<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHOLESTECH CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3826 94-3065493
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code
Number)
</TABLE>
CHOLESTECH CORPORATION
3347 INVESTMENT BOULEVARD
HAYWARD, CALIFORNIA 94545
(510) 732-7200
(Address and telephone number of Registrant's principal executive offices)
------------------------
WARREN E. PINCKERT II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHOLESTECH CORPORATION
3347 INVESTMENT BOULEVARD
HAYWARD, CALIFORNIA 94545
(510) 732-7200
(Name, address and telephone number of agent for service of process)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT P. LATTA, ESQ. CHARLES W. MULANEY, JR., ESQ.
WILSON SONSINI GOODRICH & ROSATI SKADDEN, ARPS, SLATE,
PROFESSIONAL CORPORATION MEAGHER & FLOM
650 PAGE MILL ROAD 333 WEST WACKER DRIVE
PALO ALTO, CA 94304 CHICAGO, IL 60606
(415) 493-9300 (312) 407-0700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box./ /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./ /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box./ /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, no par value......... 3,450,000 $6.25 $21,562,500 $7,435.34
</TABLE>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, based upon the average of the high and low sales prices as
reported on the Nasdaq National Market on May 3, 1996.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CHOLESTECH CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION OR CAPTION IN PROSPECTUS
- ------------------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................... Underwriting
6. Dilution.......................................... Dilution
7. Selling Security Holders.......................... Not Applicable
8. Plan of Distribution.............................. Outside and Inside Front Cover Pages of Prospectus;
Underwriting
9. Description of Securities to be Registered........ Prospectus Summary; Dividend Policy; Capi-
talization; Description of Capital Stock
10. Interests of Named Experts and Counsel............ Legal Matters; Experts
11. Information with Respect to the Registrant........ Outside and Inside Front Cover Pages of Prospectus;
Available Information; Prospectus Summary; Risk
Factors; The Company; Use of Proceeds; Dividend
Policy; Price Range of Common Stock;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business; Man-
agement; Certain Transactions; Principal
Shareholders; Description of Capital Stock;
Underwriting; Experts; Financial Statements
12. Disclosure of Commission Position on In-
demnification for Securities Act
Liabilities...................................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS, DATED MAY 9, 1996
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
Cholestech Corporation ("Cholestech" or the "Company"). The Company's Common
Stock is quoted on the Nasdaq National Market under the symbol "CTEC." On May 8,
1996, the last reported sale price for the Common Stock was $6.25 per share. See
"Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1996.
---------------------
Vector Securities International, Inc. Principal Financial Securities, Inc.
, 1996
<PAGE>
[LOGO]
[PICTURE OF PRODUCTS]
---------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "RISK FACTORS,"
"USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, THE
FOLLOWING: THE COMPANY'S HISTORY OF LOSSES AND UNCERTAINTY OF PROFITABILITY; THE
UNCERTAINTY OF MARKET ACCEPTANCE OF THE L-D-X SYSTEM; THE COMPANY'S DEPENDENCE
ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS; THE COMPANY'S LIMITED SALES,
MARKETING AND DISTRIBUTION EXPERIENCE AND DEPENDENCE ON DISTRIBUTORS; THE RISKS
ASSOCIATED WITH CASSETTE MANUFACTURING; THE COMPANY'S HIGHLY COMPETITIVE
INDUSTRY AND RAPID TECHNOLOGICAL CHANGE WITHIN THE COMPANY'S INDUSTRY; THE
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION AND RELIANCE ON
TECHNOLOGY LICENSED FROM THIRD PARTIES; CHANGES IN, OR FAILURE TO COMPLY WITH,
GOVERNMENT REGULATION; THE UNCERTAINTY OF THIRD PARTY REIMBURSEMENT FOR
PROCEDURES PERFORMED USING THE COMPANY'S PRODUCTS; THE POTENTIAL FLUCTUATIONS IN
THE COMPANY'S QUARTERLY RESULTS; THE COMPANY'S DEPENDENCE ON RETENTION AND
ATTRACTION OF KEY EMPLOYEES; GENERAL ECONOMIC AND BUSINESS CONDITIONS; AND OTHER
FACTORS REFERENCED IN THIS PROSPECTUS. SEE "RISK FACTORS."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL
INFORMATION, SHARE AND PER SHARE DATA, ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." SPECIAL NOTE: CERTAIN STATEMENTS SET
FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2
FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
Cholestech Corporation ("Cholestech" or the "Company") develops,
manufactures and markets a proprietary point of care diagnostic system (the
"L-D-X System") which measures specific analytes to detect various diseases and
disorders within five minutes using a single drop of whole blood. The Company
currently markets its L-D-X System and a series of lipid and glucose panels for
preventive screening and monitoring applications. In January 1996, the L-D-X
System and the Company's total cholesterol, high density lipoprotein ("HDL"),
triglycerides and glucose tests were granted waived status under the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), the first such waiver
granted under CLIA's newly-developed ease of use, accuracy and precision
guidelines. The CLIA waiver allows health care providers to use the L-D-X System
without the additional operating costs and extensive regulatory requirements
associated with CLIA compliance. The Company believes that the L-D-X System is
the only multi-analyte diagnostic system to be classified as waived under CLIA.
The Company believes that the L-D-X System's CLIA waived status, technological
flexibility, ease of use, accuracy and low maintenance costs provide it with
competitive advantages over other point of care diagnostic systems.
As a result of the cost and administrative burden associated with CLIA
compliance, the L-D-X System and its lipid-focused test menu were initially
marketed to health care providers performing high volume preventive risk factor
screening, including hospitals, corporate wellness programs, community health
centers and health promotion service providers. Immediate results are important
in this setting because it allows high risk individuals to be identified and
enrolled in appropriate intervention programs in the same visit. With its recent
CLIA waived status, the Company has expanded its marketing and distribution
focus to also target the monitoring market, in particular the physician office
laboratory ("POL") and pharmacy segments. The Company's access to this market
was limited prior to the CLIA waiver because of the cost and administrative
burden associated with the CLIA regulations. The Company intends to target the
54,000 POLs and 68,000 pharmacies in the United States. The Company believes
that the L-D-X System will enable health care providers in the monitoring
market, particularly POLs, to better control their medical costs by (i)
eliminating the need for patient follow-up with test results, (ii) reducing the
time before therapy can be prescribed or modified, and (iii) allowing physicians
to capture additional revenue from conducting testing in their offices. In order
to effectively penetrate this market, the Company has recently entered into a
non-exclusive distribution agreement with Physician Sales and Services, Inc.
("PSS"), a national medical products distributor with more than 700 sales
professionals who focus on the POL market.
The L-D-X System consists of a portable analyzer and proprietary disposable
test cassettes. The test cassette is the focal point of the L-D-X System and the
key to its flexibility. The Company has incorporated most of the critical
technological features of the system into the test cassette so that as new tests
are developed, the existing L-D-X Analyzer can be utilized with simple software
upgrades. The Company has recently demonstrated the feasibility of performing
immunoassay-based tests on the L-D-X Analyzer. The Company believes that, if an
immunoassay cassette is successfully developed, the L-D-X Analyzer will be the
only point of care diagnostic system capable of performing both enzyme and
immunoassay-based tests on a single instrument.
The Company intends to leverage the technological flexibility of L-D-X-
System to capitalize on attractive markets that can be served by point of care
diagnostic instruments. The Company is developing additional test cassettes
which will enable it to provide a more comprehensive line of products to the
monitoring market. These cassettes include tests for uric acid, blood urea
nitrogen and creatinine used to measure kidney function. The Company believes
that these tests, along with cholesterol and glucose, are among the most ordered
tests by physicians in the POL market. In May 1996, the Company entered into an
agreement with Metra Biosystems, Inc. ("Metra Biosystems") to develop an
immunoassay test cassette to measure bone resorption, a key gauge of the
effectiveness of osteoporosis treatment. The Company has also demonstrated the
feasibility of measuring prostate specific antigen ("PSA") for prostate cancer
screening from whole blood using the Company's technology.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............................. 3,000,000 shares
Common Stock outstanding after the Offering....... 11,131,824 shares (1)
Use of proceeds................................... For research and development, capital
expenditures, repayment of indebtedness, expansion
of sales and marketing capabilities, and other
working capital and general corporate purposes
Nasdaq National Market symbol..................... CTEC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 1,518 $ 3,744 $ 3,029 $ 4,038 $ 6,873
Cost of products sold......................................... 565 4,908 4,972 3,933 4,505
--------- --------- --------- --------- ---------
Gross profit (loss)........................................... 953 (1,164) (1,943) 105 2,368
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................................... 6,124 1,843 2,134 715 714
Sales and marketing......................................... 1,446 2,171 2,909 2,694 3,168
General and administrative.................................. 2,373 3,133 2,288 1,983 1,376
--------- --------- --------- --------- ---------
Total operating expenses.................................. 9,943 7,147 7,331 5,392 5,258
--------- --------- --------- --------- ---------
Loss from operations.......................................... (8,990) (8,311) (9,274) (5,287) (2,890)
Interest income, net.......................................... 100 246 364 243 144
--------- --------- --------- --------- ---------
Net loss...................................................... $ (8,890) $ (8,065) $ (8,910) $ (5,044) $ (2,746)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share (2)........................................ $ (13.38) $ (1.57) $ (1.14) $ (.63) $ (.34)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares (2)............................ 664 5,122 7,791 7,954 8,042
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (3)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and restricted marketable investment securities.............. $ 4,111 $ 19,501
Working capital..................................................................... 4,442 20,581
Total assets........................................................................ 9,645 25,035
Long-term obligations, net of current portion....................................... 810 11
Accumulated deficit................................................................. (49,662) (49,662)
Shareholders' equity................................................................ 5,982 22,920
</TABLE>
- ------------------
(1) Based upon shares outstanding as of March 31, 1996. Excludes: (i) 518,244
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1996, with a weighted average exercise price of $3.49 per share;
(ii) 39,242 shares of Common Stock issuable upon exercise of warrants
outstanding as of March 31, 1996, with an exercise price of $3.50 per share;
(iii) 183,412 shares of Common Stock reserved for future issuance under the
Company's stock plans; (iv) 39,526 shares of Common Stock issued to Metra
Biosystems in May 1996 at a purchase price of $6.325 per share; and (v) an
aggregate of up to $750,000 of Common Stock to be purchased by Metra
Biosystems at fair market value upon achievement of certain milestones by
the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Strategic Relationships,"
"Management -- 1988 Stock Incentive Program," "-- Employee Stock Purchase
Plan," "Description of Capital Stock" and Notes 7 and 10 of Notes to
Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing net loss per share.
(3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered by
the Company hereby, at an assumed public offering price of $6.25 per share
and after deducting estimated underwriting discounts and commissions and the
estimated expenses of the Offering, and the anticipated application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 2 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The Company has
experienced significant operating losses since inception and, as of March 31,
1996, had an accumulated deficit of $49.7 million. The Company has not generated
significant revenues to date, and there can be no assurance that significant
revenues will ever be achieved. The Company expects to continue to incur
operating losses as well as negative cash flows from operations as it expands
its product research and development efforts for new test panels, expands sales
and marketing activities to address the monitoring market, particularly POLs,
and the screening market, and expands manufacturing capacity for existing and
new test panels. The Company's ability to increase revenues and achieve
profitability and positive cash flows from operations will depend, in part, upon
successful commercialization of existing product offerings in the monitoring
market, particularly to POLs, of which there can be no assurance. See "--
Uncertainty of Market Acceptance of L-D-X System." The Company's ability to
increase revenues and achieve profitability and positive cash flows from
operations will also depend upon the Company's ability to complete the
development of and successfully introduce additional diagnostic tests currently
under development. There can be no assurance that the Company's development
efforts will result in commercially available products, that the Company will
obtain required regulatory clearances or approvals for any new tests in a timely
manner, or at all, that the Company will be successful in introducing any new
tests, that the Company will be able to achieve and maintain cost-efficient,
high-volume manufacturing capacity for any new tests or that any new tests will
achieve a significant level of market acceptance. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will impact the Company's ability to achieve
profitability and positive cash flows from operations. There can be no assurance
that the Company will ever achieve significant commercial revenues or
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF MARKET ACCEPTANCE OF L-D-X SYSTEM. The Company has generated
only limited revenues to date, primarily from sales of the L-D-X System to
hospitals, public health departments, corporate wellness programs, health
promotion service providers, managed care organizations, community health
centers, the military and others in the screening market. In order for the
Company to increase revenues and achieve profitability and positive cash flows
from operations, the L-D-X System must achieve a significant degree of market
acceptance among health care providers in the monitoring market, particularly
POLs. The substantial majority of diagnostic tests used by physicians and other
health care providers are performed by independent clinical laboratories and
hospital-based laboratories. Physicians and other health care providers will not
use the L-D-X System unless they determine that it is an attractive alternative
to other means of screening or monitoring blood detected diseases, particularly
independent clinical laboratories and hospital-based laboratories, and that the
clinical benefits to the patient and cost savings achieved through use of the
L-D-X System outweigh the cost of the system. Such determination will depend, in
part, upon the L-D-X System's accuracy, ease of use, rapid test time,
reliability, cost effectiveness, portability and level of third party
reimbursement. Even if the advantages of the L-D-X System in diagnosing and
monitoring patients with blood detected diseases are established as clinically
significant, physicians, medical clinics, pharmacists and other health care
providers may elect not to purchase and use the L-D-X System for any number of
other reasons. For example, physicians and other health care providers may not
change their established means of having such tests performed, may not make the
necessary investment to purchase the Company's products or may not be able to
obtain adequate reimbursement from third party payors for tests performed using
the L-D-X System. As a result of these and other factors, there can be no
assurance that demand for the L-D-X System, particularly in the monitoring
market, will be sufficient to allow for profitable operations. In addition, even
if the Company is successful in placing analyzers at the point of care, there
can be no assurance that placement of analyzers will result in sustained demand
for cassettes. The
5
<PAGE>
L-D-X System and its component analyzer and testing cassettes, all of which are
based upon a single set of core technologies, are currently the Company's only
products and will continue to account for substantially all of the Company's
revenues for the foreseeable future. Because the L-D-X System currently
represents the Company's sole product focus, the Company could be required to
cease operations if the L-D-X System does not achieve a significant level of
market acceptance. See "Business -- Market Overview," "-- Products," "-- Sales
and Marketing" and "-- Third Party Reimbursement."
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The Company is
in the early stages of developing tests designed to extend the L-D-X System's
capability to include additional tests useful to health care providers,
particularly POLs. The Company believes that its revenue growth and
profitability will depend, in part, upon its ability to complete development of
and successfully introduce these new tests. In addition, some of these new tests
depend on the development of immunoassay-based technologies and the
incorporation of these technologies into the L-D-X System. The Company will be
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new tests. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new tests, that
regulatory clearance or approval of any new tests will be granted by the FDA on
a timely basis, if at all, or that the new tests will adequately meet the
requirements of the applicable market or achieve market acceptance. For example,
although the Company believes that most of the new tests under development will
require a pre-market clearance under Section 510(k) ("510(k)") of the Federal
Food, Drug and Cosmetic Act of 1938, as amended, for marketing in the United
States. a requirement that the Company file a pre-market approval ("PMA")
application for a new test would significantly delay the Company's ability to
market such test and significantly increase the costs of development. Further,
in order to achieve significant market acceptance, any new tests must be
classified as waived under CLIA, of which there can be no assurance. In order to
successfully commercialize any new tests, the Company will be required to
establish and maintain reliable, cost-efficient, high-volume manufacturing
capacity for such tests. The Company has in the past encountered difficulties in
scaling up production of new test cassettes, including problems involving
production yields, quality control and assurance, variations and impurities in
the raw materials and performance of the manufacturing equipment. If the Company
is unable for technological or other reasons, to complete development,
introduction and the scale up of manufacturing of any new tests or if such new
tests do not achieve a significant level of market acceptance, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Business -- Products," "-- Manufacturing" and "--
Government Regulation."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE; DEPENDENCE ON THIRD
PARTY DISTRIBUTORS. In order for the Company to increase revenues and achieve
profitability, the L-D-X System must achieve a significant degree of market
acceptance among health care providers in the monitoring market, particularly
POLs. The Company has only limited experience marketing and selling to the
monitoring market in the United States. The Company intends to distribute its
products to this market primarily through a limited number of national
distributors. The Company has only recently entered into a distribution
arrangement with such a national distributor, PSS. The Company may be required
to enter into additional distribution arrangements in order to achieve broad
distribution of its products. There can be no assurance that the Company will be
able to maintain the recently established distribution relationship with PSS or
that the Company will be able to enter into and maintain arrangements with
additional distributors on a timely basis, if at all. The Company will be
dependent upon these distributors to assist it in promoting market acceptance of
the L-D-X System and creating demand for the Company's products. The risks
associated with dependence upon distributors will be exacerbated by the
Company's intention to rely on a limited number of distributors, with the result
that sales to these distributors will account for a significant portion of the
Company's revenues. There can be no assurance that these distributors will
devote the resources necessary to provide effective sales and marketing support
to the Company. In addition, the Company's distributors may give higher priority
to the products of other medical suppliers, thus reducing their efforts to sell
the Company's products. The Company does not expect that its distributors will
be contractually committed to make future purchases of the Company's
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products and could therefore discontinue carrying the Company's products in
favor of a competitor's product at any time or for any reason. If the Company is
unable to establish appropriate arrangements with distributors or if any of the
Company's distributors become unwilling or unable to promote, market and sell
the L-D-X System, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business -- Sales and
Marketing" and "-- Strategic Relationships."
In addition, in order to increase sales and market acceptance of the L-D-X
System, the Company will also be required to expand its direct sales force and
marketing organization. Establishing a sales and marketing capability sufficient
to support the level of sales necessary for the Company to attain profitability
will require substantial efforts and significant management and financial
resources. The Company is currently actively recruiting a new executive officer
to replace the Company's former Executive Vice President of Marketing and Sales,
who resigned in April 1996. There can be no assurance that the Company will be
able to recruit and retain direct sales and marketing personnel, in particular a
new executive officer of sales and marketing, in order to build a sales and
marketing organization, that building such a sales and marketing organization
will be cost effective or that the Company's sales and marketing efforts will be
successful. See "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH CASSETTE MANUFACTURING. The Company manufactures
internally all of the test cassettes that are components of the L-D-X System.
The manufacture of cassettes is a highly complex and precise process. Such
manufacturing is sensitive to a wide variety of factors, including variations
and impurities in the raw materials, difficulties in the manufacturing process,
performance of the manufacturing equipment and the level of contaminants in the
manufacturing environment. The Company has in the past experienced lower than
expected production yields that have adversely affected gross margins and
delayed product shipments. To the extent that the Company does not achieve
acceptable manufacturing yields of test cassettes or experiences product
shipment delays, the Company's business, financial condition and results of
operations could be materially adversely affected. The Company's cassette
manufacturing lines represent a single point of potential failure in its
manufacturing process that would be costly and time consuming to replace if
their operation were interrupted. Furthermore, the Company has a limited number
of employees dedicated to the operation and maintenance of the cassette
manufacturing equipment, the loss of whom could impact the Company's ability to
effectively operate and service such equipment. The interruption of cassette
manufacturing operations or the loss of employees dedicated to the cassette
manufacturing facility could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company
manufactures all of the cassettes at its Hayward, California manufacturing
facility, and any prolonged inability to utilize such facility as a result of
earthquake, fire or otherwise would have a material adverse effect on the
Company's business.
The Company believes that it will be required to expand manufacturing
capacity for new and existing test cassettes. There can be no assurance that
such expansion of cassette manufacturing capacity can be completed in a timely
fashion, if ever. Failure to increase cassette manufacturing capacity on a cost
effective and timely basis and in compliance with applicable regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company will be
required to build a new cassette manufacturing line for the immunoassay test
cassettes under development. To date, the Company has not developed the core
technologies, processes and production equipment for an immunoassay cassette
manufacturing line. Failure to successfully develop an immunoassay cassette
manufacturing line and achieve acceptable yields could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Manufacturing."
HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE. The testing market
in which the Company competes is intensely competitive. The Company's
competition consists mainly of independent clinical laboratories and
hospital-based laboratories, as well as manufacturers of bench top and other
point of care analyzers. The substantial majority of diagnostic tests used by
physicians and other health
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care providers are currently performed by independent clinical laboratories and
hospital-based laboratories. The Company expects that these laboratories will
compete intensely to maintain their dominance of the testing market. In order to
achieve market acceptance for the L-D-X System, the Company will be required to
demonstrate that the L-D-X System is an attractive alternative to the clinical
laboratory and hospital-based laboratory. This will require physicians to change
their established means of having such tests performed. There can be no
assurance that the L-D-X System will be able to compete with the testing
services provided by these laboratories. See "-- Uncertainty of Market
Acceptance for L-D-X System." In addition, companies having a significant
presence in the diagnostic market, such as Abbott Laboratories, Clinical
Diagnostic Systems, a division of Johnson and Johnson which was formerly a
division of Eastman Kodak Company, and Boehringer Mannheim GmbH ("Boehringer
Mannheim"), have developed or are developing analyzers targeted for point of
care. These competitors have substantially greater financial, technical,
research and other resources and larger, more established marketing, sales,
distribution and service organizations than the Company. In addition, such
competitors offer broader product lines than the Company, have greater name
recognition than the Company, and offer discounts as a competitive tactic. In
addition, several smaller companies are currently making or developing products
that compete or will compete with those of the Company. The Company believes
that it currently has a competitive advantage with the classification of its
existing products as waived under CLIA. The Company expects that the
reclassification of the L-D-X System as waived under CLIA will result in
competitors seeking to develop products that qualify for waived classification.
The Company expects that such competitors will compete intensely to maintain and
increase their market shares. There can be no assurance that the Company's
competitors will not succeed in obtaining CLIA waived status for their products
or in developing or marketing technologies or products that are more effective
and commercially attractive than the Company's current or future products, or
that would render the Company's technologies and products obsolete or
noncompetitive. The Company's products must compete effectively overall with the
existing and future products of its competitors primarily on the basis of
ability to perform tests at the point of care, ease of use, testing of multiple
analytes from a single sample, ability to conduct tests without a skilled
technician or a blood pretreatment step, the breadth of tests available, market
presence, cost effectiveness, precision, accuracy and immediacy of results.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing, distribution or support capabilities to
compete successfully in the future. See "Business -- Products -- Products Under
Development," "-- Technology" and "-- Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; LICENSE OF
TECHNOLOGY OF THIRD PARTIES. The Company's ability to compete effectively will
depend in part on its ability to develop and maintain proprietary aspects of its
technology, and operate without infringing the proprietary rights of others.
Cholestech has eight United States and several foreign issued patents and is
currently prosecuting patent applications with certain foreign patent offices.
There can be no assurance that any of the Company's pending patent applications
will result in the issuance of any patents, or that, if issued, any such patents
will offer protection against competitors with similar technology. There can be
no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created thereunder
will provide a competitive advantage. In addition, there can be no assurance
that competitors, many of which have substantially greater resources than the
Company and have made substantial investments in competing technologies, will
not seek to apply for and obtain patents covering technologies that are more
effective than the Company's technologies or would render the Company's
technologies or products obsolete or uncompetitive, or will prevent, limit or
interfere with the Company's ability to make, use or sell its products either in
the United States or in international markets.
The medical products industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings conducted in the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to
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enforce any patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceeding will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties which may not be available on
commercially reasonable terms.
The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies. There can be no
assurance that the Company will be able to obtain licenses for technology
patented by others on commercially reasonable terms, that it will be able to
develop alternative approaches if unable to obtain licenses or that the
Company's current and future licenses will be adequate for the operation of
Cholestech's business. The failure to obtain such licenses or identify and
implement alternative approaches could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets. See "Business -- Patents
and Proprietary Technology."
GOVERNMENT REGULATION. The manufacture and sale of diagnostic products,
including the L-D-X System, are subject to extensive regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Company will not be able to commence marketing
or commercial sales in the United States of any of the new tests until it
receives clearance or approval from the FDA. The process of obtaining FDA and
other required regulatory clearances and approvals is lengthy, expensive and
uncertain. As a result, there can be no assurance that any of the Company's new
tests under development, even if successfully developed, will ever obtain such
clearance or approval. Additionally, certain material changes to medical
products already cleared or approved by the FDA are also subject to further FDA
review and clearance or approval. The loss of previously obtained clearances, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations. The L-D-X Analyzer and all existing test cassettes
required 510(k) clearance. A 510(k) clearance is subject to continual review and
later discovery of previously unknown problems may result in restrictions on the
product's marketing or withdrawal of the product from the market. In general,
the Company intends to develop and market tests that will require 510(k)
clearance. It generally takes from four to twelve months from the date of
submission to obtain 510(k) clearance, but it can take longer. In addition,
certain of the Company's products under development, such as the PSA test, may
require submission of a PMA application which is a much longer and more costly
process. A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or if
it is a Class III device for which the FDA has called for PMAs. See "Business --
Government Regulation." A PMA application may be submitted to the FDA only after
clinical trials and the required patient follow-up for a particular test are
successfully completed. Upon filing of a PMA application, the FDA commences a
review process that generally takes one to three years from the date on which
the PMA application is accepted for filing, but may take significantly longer.
There can be no assurance that the Company's products under development will
require only 510(k) clearance rather than the more lengthy PMA approval. A
requirement that the Company file a PMA application for a new test would
significantly delay the Company's ability to market such test and significantly
increase the costs of development. See "Business -- Government Regulation."
The use of Cholestech's products and those of its competitors is also
affected by CLIA and related federal and state regulations, which provide for
regulation of laboratory testing. The scope of these regulations includes
quality control, proficiency testing, personnel standards and federal
inspections.
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CLIA categorizes tests as "waived," or as being "moderately complex" or "highly
complex," on the basis of specific criteria. Prior to January 1996, CLIA
categorized the L-D-X System as moderately complex. The testing of control
materials on the L-D-X System, as required by CLIA for laboratories performing
moderately complex tests, involved the additional daily expense of two test
cassettes and control materials, and adversely affected the cost effective
utilization of the L-D-X System by low volume users. In January 1996, the L-D-X
System and the total cholesterol ("TC"), HDL, Triglycerides and Glucose tests in
any combination were reclassified as waived under CLIA. In order to successfully
commercialize the tests that are currently under development, the Company
believes that it will be critical to obtain waived classification for such tests
under CLIA. There can be no assurance that any new tests developed by the
Company will qualify for the waived classification. Any failure of the new tests
to obtain waived status under CLIA will adversely impact the Company's ability
to commercialize such tests, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that any future amendment of CLIA or the promulgation
of additional regulations impacting laboratory testing will not have an adverse
effect on the Company's ability to market the L-D-X System. For example, if CLIA
regulations were modified in a manner that reduced regulatory requirements and
burdens faced by competitive products, any competitive advantage of the L-D-X
System's waived status would be reduced or eliminated.
The Company's manufacturing processes, as well as in certain instances those
of its contract manufacturers are also subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes. The Company and its contract
manufacturers must economically manufacture products in compliance with federal,
state and foreign regulations regarding the manufacture of health care products
and diagnostic devices, including current Good Manufacturing Practice ("cGMP")
regulations and similar foreign regulations and state and local health, safety
and environmental regulations, which include testing, control and documentation
requirements. Failure to comply with cGMP and other applicable regulatory
requirements by the Company and in certain circumstances, its contract
manufacturers, including marketing products for unapproved uses, could result
in, among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant premarket clearance or premarket approval for
devices, withdrawal of approvals and criminal prosecution. Changes in existing
regulations or adoption of new governmental regulations or policies could
prevent or delay regulatory approval of the Company's products. There can be no
assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations. See
"Business -- Government Regulation."
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT. In the United States,
health care providers, such as hospitals and physicians, that purchase
diagnostic products such as the Company's L-D-X System, generally rely on third
party payors, principally private health insurance plans, federal Medicare and
state Medicaid, to reimburse all or part of the cost of the procedure in which
the product is being used. The Company's ability to commercialize its products
successfully in the United States will depend in part on the extent to which
reimbursement for the costs of such products and related treatment will be
available from government health authorities (such as HCFA, which determines
Medicare reimbursement levels), private health insurers and other organizations.
Such third party payors can affect the pricing or the relative attractiveness of
the Company's products by regulating the maximum amount of reimbursement
provided by such payors for testing services. Reimbursement is currently not
available for certain uses of the Company's products. For example, the cost of
the L-D-X System is generally not subject to reimbursement by government and
other third party payors. In addition, the tests performed by public health
departments, corporate wellness programs and other large volume users in the
screening market are generally not subject to reimbursement. In addition,
certain health care providers are moving towards a managed care system in which
such providers contract to provide comprehensive health care for a fixed cost
per patient. Managed care providers are attempting to control the cost of health
care by authorizing fewer elective procedures, such as screening of blood
disease levels. The Company is unable to predict what changes will be made in
the reimbursement methods utilized by third party payors. The Company could be
adversely affected by changes in
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reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for procedures
in which the Company's products are used. Third party payors are increasingly
scrutinizing and challenging the prices charged for medical products and
services. Decreases in reimbursement amounts for tests performed using the
Company's products may decrease amounts physicians and other practitioners are
able to charge patients, which in turn may adversely affect the Company's
ability to sell its products on a profitable basis. Failure by physicians and
other users to obtain reimbursement from third party payors, or changes in
government and private third party payors' policies toward reimbursement of
tests employing the Company's products could have a material adverse effect on
the Company's business. Given the efforts to control and reduce health care
costs in the United States in recent years, there can be no assurance that
currently available levels of reimbursement will continue to be available in the
future for the Company's existing products or products under development.
Effective October 1, 1991, HCFA adopted new regulations providing for the
inclusion of capital-related costs in the prospective payment system, under
which providers are reimbursed on a per-diagnosis basis at fixed rates unrelated
to actual costs, based on diagnostic related groups ("DRGs"). Under this system
of reimbursement, equipment costs generally will not be reimbursed separately,
but rather will be included in a single, fixed-rate, per patient reimbursement.
These regulations are being phased in over a ten year period, and, although the
full implications of these regulations cannot yet be known, the Company believes
that the new regulations will place more pressure on hospitals' operating
margins, causing them to limit capital expenditures. These regulations could
have an adverse effect on the Company if hospitals decide to defer obtaining
medical equipment as a result of any such limitation on their capital
expenditures. The Company is unable to predict what adverse impact on the
Company, if any, additional government regulations, legislation or initiatives
or changes by other payors affecting reimbursement or other matters that may
influence decisions to obtain medical equipment may have.
In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance.
The Company believes that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance as to either United States or foreign markets that third party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis. See "Business -- Third Party
Reimbursement."
FLUCTUATIONS IN QUARTERLY RESULTS. The Company may experience significant
fluctuations in revenues and results of operations on a quarter to quarter basis
in the future. Quarterly operating results will fluctuate due to numerous
factors, including the timing and level of market acceptance of the L-D-X
System, particularly by POLs, the timing of introduction and availability of new
tests, the timing and level of expenditures associated with new product
development activities, the timing and level of expenditures associated with
expansion of sales and marketing activities and overall operations, the
Company's ability to cost effectively expand cassette manufacturing capacity and
maintain consistently acceptable yields in the manufacture of cassettes, the
timing of establishment of strategic distribution arrangements and the success
of the activities conducted under such arrangements, variations in manufacturing
efficiencies, changes in demand for its products, order cancellations,
competition, changes in government regulation and other factors, the timing of
significant orders from and shipments to customers, and general economic
conditions. These factors are difficult to forecast, and these or other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations. Fluctuations in quarterly demand for
products may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning, disrupt cash flow
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from operations and contribute to the volatility of the Company's stock price.
The Company's expenses are based in part on the Company's expectations as to
future revenue levels and to a large extent are fixed in the short term. If
revenues do not meet expectations, the Company's business, financial condition
and results of operations could be materially adversely affected. The Company
believes that period to period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. As a result of the foregoing factors, it is likely that in some
future quarter the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In such event the price of
the Company's Common Stock could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Manufacturing."
NEED TO MANAGE EXPANDING OPERATIONS. If the Company is successful in
achieving market acceptance for the L-D-X System, the Company will be required
to expand its operations, particularly in the areas of research and development,
sales and marketing and manufacturing. As the Company expands its operations in
these areas, such expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon the
Company's management, operating and financial systems and resources. To
accommodate any such growth and compete effectively, the Company will be
required to implement and improve information systems, procedures and controls,
and to expand, train, motivate and manage its work force. The Company's future
success will depend to a significant extent on the ability of its current and
future management personnel to operate effectively, both independently and as a
group. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's operational,
financial and management systems or to expand, train, motivate or manage
employees as required by future growth, if any, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Dependence on Retention and Attraction of Key Employees" and "Business
- -- Employees" and "Management."
DEPENDENCE ON SUPPLIERS. Certain key components and raw materials used in
the manufacturing of the Company's products are currently provided by
single-source vendors. Although the Company believes that alternative sources
for such components and raw materials are available, any supply interruption in
a single-sourced raw material would have a material adverse effect on the
Company's ability to manufacture products until a new source of supply were
qualified. There can be no assurance that the Company will be successful in
qualifying additional sources on a timely basis or at all, which would have a
material adverse effect on the Company's business. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's ability to manufacture products. Also,
because the Company is a small customer of many of its suppliers, there can be
no assurance that suppliers will devote adequate resources to supplying the
Company's needs. Any interruption or reduction in the future supply of any key
components or raw materials currently obtained from single or limited sources
could have a material adverse effect on the Company's business, operating
results and financial condition in any given period. See "Business --
Manufacturing."
DEPENDENCE ON RETENTION AND ATTRACTION OF KEY EMPLOYEES. The Company's
success depends in significant part upon the continued service of certain key
scientific, technical, regulatory and managerial personnel, and its continuing
ability to attract and retain additional highly qualified scientific, technical,
clinical, regulatory and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to retain
such personnel or that it can attract or retain other highly qualified
scientific, technical, clinical, regulatory and managerial personnel in the
future, including key sales and marketing personnel. In particular, the Company
is currently actively recruiting a new executive officer to replace the
Company's former Executive Vice President of Marketing and Sales, who resigned
in April 1996. The loss of key personnel or the inability to hire or retain
qualified personnel, in particular a new executive officer of sales and
marketing, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
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POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company intends to expend
substantial funds for research and product development, expansion of sales and
marketing activities, expansion of manufacturing capacity and other working
capital and general corporate purposes. Although the Company believes that the
net proceeds of the Offering, together with its unrestricted cash balances,
internally generated funds, bank borrowings under existing lines of credit and
proceeds from issuances of Common Stock to Metra Biosystems, will be sufficient
to meet its capital requirements for the foreseeable future, there can be no
assurance that the Company will not require additional financing. For example,
the Company may be required to expend greater than anticipated funds if
unforeseen difficulties arise in expanding manufacturing capacity for existing
cassettes or in the course of completing required additional development,
obtaining necessary regulatory approvals, obtaining waived status under CLIA or
introducing or scaling up manufacturing for new tests. The Company's future
liquidity and capital requirements will depend upon numerous additional factors,
including the costs and timing of expansion of manufacturing capacity, the
number and type of new tests the Company seeks to develop, the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the progress
of commercialization efforts of the Company's distributors, the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, developments related to regulatory and third
party reimbursement matters and CLIA, and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that such
financing, if required, will be available on satisfactory terms, if at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SUFFICIENCY AND AVAILABILITY OF PRODUCT LIABILITY INSURANCE. Sale of the
Company's products entails risk of product liability claims. The medical testing
industry has historically been litigious, and the Company faces financial
exposure to product liability claims in the event that use of its products
result in personal injury. The Company also faces the possibility that defects
in the design or manufacture of its products might necessitate a product recall.
There can be no assurance that the Company will not experience losses due to
product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $5.0 million per
occurrence and $5.0 million annually in the aggregate, and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. No assurance can be
given that product liability insurance can be maintained in the future at a
reasonable cost or in sufficient amounts to protect the Company against losses
due to liability. An inability to maintain insurance at an acceptable cost or to
otherwise protect against potential product liability could prevent or inhibit
the continued commercialization of the Company's products. In addition, a
product liability claim in excess of relevant insurance coverage or product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability and
Insurance."
UNCERTAINTY RELATED TO HEALTH CARE REFORM. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative health care delivery and payment systems. Potential approaches that
have been considered include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other fundamental changes to the
health care delivery
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system. Legislative debate is expected to continue in the future, and market
forces are expected to demand reduced costs. The Company cannot predict what
impact the adoption of any federal or state health care reform measures, future
private sector reform or market forces may have on its business.
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING. Although the Company
expects to use approximately $6.0 million of the net proceeds of this Offering
for repayment of indebtedness, for research and development, expansion of
manufacturing capacity, and expansion of sales and marketing capabilities during
fiscal 1997, the Company's management will retain broad discretion as to the
allocation of a significant portion of the net proceeds of this Offering. See
"Use of Proceeds."
ISSUANCE OF PREFERRED STOCK COULD DELAY OR PREVENT CORPORATE TAKEOVER. The
Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the shareholders. The issuance of Preferred Stock under certain circumstances
could have the effect of delaying or preventing a change in control of the
Company or otherwise adversely affecting the rights of the holders of Common
Stock. See "Description of Capital Stock."
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the shares of
Common Stock, like that of the common stock of many other medical products and
high technology companies, has in the past been, and is likely in the future to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new commercial
products by the Company or competitors, government regulation, changes in the
current structure of the health care financing and payment systems, developments
in or disputes regarding patent or other proprietary rights, economic and other
external factors and general market conditions may have a significant effect on
the market price of the Common Stock. Moreover, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for medical products and high technology
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigations have
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. See "Price Range of Common Stock."
DILUTION. Investors participating in the Offering will incur immediate,
substantial dilution. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends since
inception and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
THE COMPANY
Cholestech was incorporated under the laws of the state of California on
February 2, 1988. The Company's principal executive offices are located at 3347
Investment Boulevard, Hayward, California 94545, and its telephone number is
(510) 732-7200.
Cholestech, L-D-X and the logo are registered trademarks of the Company.
This Prospectus also includes trademarks of companies other than the Company.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $16.9 million
($19.6 million if the Underwriters' over-allotment option is exercised in full),
based on an assumed Offering price of $6.25 per share, and after deducting
estimated underwriting discounts and commissions and the estimated expenses of
the Offering.
From these estimated net proceeds, the Company will repay the outstanding
balances of the Company's (i) bank line of credit (approximately $250,000 as of
March 31, 1996), which borrowings bore interest at 8.25% per annum as of March
31, 1996, which mature on October 31, 1996, and which were incurred to provide
working capital and (ii) a long-term note of approximately $1.3 million as of
March 31, 1996, which borrowings bear interest at a rate of 16% per annum, which
are required to be repaid in 36 monthly installments of approximately $53,000,
and which were incurred to provide working capital. The balance of the net
proceeds will be used for research and development related to the expansion of
test menus, of which approximately $2.0 million has been budgeted for fiscal
1997, capital expenditures related to expansion of manufacturing capacity, of
which approximately $2.0 million has been budgeted for fiscal 1997, expansion of
sales and marketing capabilities, of which approximately $500,000 has been
budgeted for fiscal 1997, and for other working capital and general corporate
purposes. The Company may also use a portion of the net proceeds for the
acquisition of technologies, businesses or products that are complementary to
those of the Company, although no such acquisitions are planned or being
negotiated as of the date of this Prospectus, and no portion of the net proceeds
has been allocated for any specific acquisition. Pending such uses, the net
proceeds of this Offering will be invested in short-term, interest bearing,
investment grade securities.
The actual amount and timing of net proceeds of this Offering expended for
each purpose may vary significantly depending upon many factors, including the
costs and timing of expansion of manufacturing capacity, the number and type of
tests the Company seeks to develop, the success of these development efforts,
the costs and timing of expansion of sales and marketing activities, the extent
to which the Company's existing and new products gain market acceptance,
competing technological and market developments, the progress of
commercialization efforts of the Company's distributors, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, developments related to regulatory and third
party reimbursement matters and CLIA, and other factors.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "CTEC." On May 8, 1996, the last reported sale price for the Company's
Common Stock on the Nasdaq National Market was $6.25 per share. The following
table sets forth the quarterly high and low closing sale prices for the
Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1995
First Quarter $ 5.25 $ 2.50
Second Quarter 3.25 1.75
Third Quarter 3.25 1.13
Fourth Quarter 3.00 1.50
FISCAL YEAR 1996
First Quarter $ 2.50 $ 1.50
Second Quarter 3.00 2.13
Third Quarter 3.75 2.25
Fourth Quarter 7.56 3.13
FISCAL YEAR 1997
First Quarter (through May 8, 1996) $ 7.00 $ 6.00
</TABLE>
On May 7, 1996, there were approximately 308 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company currently expects to retain future earnings, if any, to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996 and as adjusted to give effect to the sale of 3,000,000 shares
of Common Stock offered by the Company hereby at an assumed Offering price of
$6.25 per share, and after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering, and the anticipated
application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (2)
--------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt including current portion of long-term liabilities (1)................ $ 782 $ 33
--------- ---------------
--------- ---------------
Long-term liabilities, net of current portion (1)..................................... $ 810 $ 11
--------- ---------------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized, none issued and
outstanding, actual and as adjusted................................................ -- --
Common Stock, no par value; 25,000,000 shares authorized, 8,131,824 shares issued
and outstanding, actual; 11,131,824 shares issued and outstanding, as adjusted
(2)................................................................................ 55,644 72,582
Accumulated deficit................................................................. (49,662) (49,662)
--------- ---------------
Total shareholders' equity........................................................ 5,982 22,920
--------- ---------------
Total capitalization............................................................ $ 6,792 $ 22,931
--------- ---------------
--------- ---------------
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Financial Statements.
(2) Excludes: (i) 518,244 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1996, with a weighted average exercise
price of $3.49 per share; (ii) 39,242 shares of Common Stock issuable upon
exercise of warrants outstanding as of March 31, 1996, with an exercise
price of $3.50 per share; (iii) 183,412 shares of Common Stock reserved for
future issuance under the Company's stock plans; (iv) 39,526 shares of
Common Stock issued to Metra Biosystems in May 1996 at a purchase price of
$6.325 per share; and (v) an aggregate of up to $750,000 of Common Stock to
be purchased by Metra Biosystems at fair market value upon achievement of
certain milestones by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business -- Strategic
Relationships," "Management -- 1988 Stock Incentive Program," "-- Employee
Stock Purchase Plan," "Description of Capital Stock" and Notes 7 and 10 of
Notes to Financial Statements.
17
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was $5.7
million, or $0.70 per share. Net tangible book value per share is equal to the
Company's net tangible assets (tangible assets of the Company less total
liabilities) divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in net tangible book value after
March 31, 1996 other than to give effect to the sale of the 3,000,000 shares of
Common Stock by the Company in the Offering at an assumed Offering price of
$6.25 per share and after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering, the pro forma net
tangible book value of the Company as of March 31, 1996 would have been $22.6
million, or $2.03 per share. This represents an immediate increase in pro forma
net tangible book value of $1.33 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $4.22 per share to
new investors. The following table sets forth the per share dilution to new
investors in the Offering:
<TABLE>
<S> <C> <C>
Assumed Offering price per share..................................... $ 6.25
Net tangible book value per share at March 31, 1996................ $ 0.70
Increase per share attributable to new investors................... 1.33
-----
Pro forma net tangible book value per share after the Offering....... 2.03
---------
Dilution per share to new investors.................................. $ 4.22
---------
---------
</TABLE>
The foregoing computations exclude: (i) 518,244 shares of Common Stock
issuable upon exercise of options outstanding as of March 31, 1996, with a
weighted average exercise price of $3.49 per share; (ii) 39,242 shares of Common
Stock issuable upon exercise of warrants outstanding as of March 31, 1996, with
an exercise price of $3.50 per share; (iii) 183,412 shares of Common Stock
reserved for future issuance under the Company's stock plans; (iv) 39,526 shares
of Common Stock issued to Metra Biosystems in May 1996 at a purchase price of
$6.325 per share; and (v) an aggregate of up to $750,000 of Common Stock to be
purchased by Metra Biosystems at fair market value upon achievement of certain
milestones by the Company. To the extent that such options and warrants are
exercised or such shares are issued, there will be further dilution to new
investors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Strategic Relationships," "Management --
1988 Stock Incentive Program," "-- Employee Stock Purchase Plan," "Description
of Capital Stock" and Notes 7 and 10 of Notes to Financial Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The statement of operations data set forth below
for the fiscal years ended March 31, 1994, 1995 and 1996 and the balance sheet
data as of March 31, 1995 and 1996 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP, independent accountants,
which are included elsewhere in this Prospectus, and are qualified by reference
to such financial statements and notes thereto. The statement of operations data
for the fiscal years ended March 31, 1992 and 1993 and the balance sheet data as
of March 31, 1992, 1993 and 1994 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP and are not included
herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Products............................................ $ 939 $ 3,744 $ 3,029 $ 4,038 $ 6,873
Licenses............................................ 579 -- -- -- --
--------- --------- --------- --------- ---------
1,518 3,744 3,029 4,038 6,873
Cost of products sold................................. 565 4,908 4,972 3,933 4,505
--------- --------- --------- --------- ---------
Gross profit (loss)................................... 953 (1,164) (1,943) 105 2,368
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................ 6,124 1,843 2,134 715 714
Sales and marketing................................. 1,446 2,171 2,909 2,694 3,168
General and administrative.......................... 2,373 3,133 2,288 1,983 1,376
--------- --------- --------- --------- ---------
Total operating expenses.......................... 9,943 7,147 7,331 5,392 5,258
--------- --------- --------- --------- ---------
Loss from operations.................................. (8,990) (8,311) (9,274) (5,287) (2,890)
Interest income, net.................................. 100 246 364 243 144
--------- --------- --------- --------- ---------
Net loss.............................................. $ (8,890) $ (8,065) $ (8,910) $ (5,044) $ (2,746)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share (1)................................ $ (13.38) $ (1.57) $ (1.14) $ ( .63) $ ( .34)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares (1).................... 664 5,122 7,791 7,954 8,042
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and restricted marketable
securities........................................... $ 4,355 $ 18,964 $ 11,058 $ 5,230 $ 4,111
Working capital....................................... 1,942 14,660 9,239 5,929 4,442
Total assets.......................................... 8,730 25,399 15,685 10,041 9,645
Long-term liabilities................................. 650 361 54 44 810
Accumulated deficit................................... (24,898) (32,962) (41,872) (46,916) (49,662)
Shareholders' equity.................................. 4,264 21,991 13,412 8,513 5,982
</TABLE>
- --------------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing net loss per share.
(2) The Company's fiscal year is a 52- 53 week period ending on the last Friday
in March. All fiscal years referenced in this Prospectus consist of 52
weeks, except fiscal 1995, which consisted of 53 weeks. For convenience, the
Company has indicated in this Prospectus that its fiscal year ends on March
31.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION OF CHOLESTECH
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS. SPECIAL NOTE: CERTAIN STATEMENTS SET
FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2
FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
The Company develops, manufactures and markets a proprietary point of care
diagnostic system which measures specific analytes to detect various diseases
and disorders within five minutes using a single drop of whole blood. The
Company has experienced significant operating losses since inception and, as of
March 31, 1996, had an accumulated deficit of $49.7 million. The Company has not
generated significant revenues to date, and there can be no assurance that
significant revenues will ever be achieved. The Company is developing certain
additional tests designed to extend the L-D-X System's capabilities. The Company
believes that its future growth will depend, in part, upon its ability to
complete development and successfully introduce these new tests. The Company
expects to continue to incur operating losses as well as negative cash flows
from operations as it expands product research and development efforts for new
test panels, pursues regulatory clearances and approvals, expands sales and
marketing activities to address the monitoring market, and develops and expands
manufacturing capacity for existing and new test panels. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will impact the Company's ability to achieve
profitability and positive cash flows from operations.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 1995 AND 1996
REVENUES. The Company's revenues increased by 70.2% from $4.0 million in
fiscal 1995 to $6.9 million in fiscal 1996. Domestic revenues increased by 72.2%
from $3.2 million in fiscal 1995 to $5.6 million in fiscal 1996 while
international revenues increased by 62.2% from $817,000 in fiscal 1995 to $1.3
million in fiscal 1996. The increase in revenues reflected increased unit sales
of the L-D-X Analyzer and test cassettes to hospitals, managed care
organizations, public health departments, corporations and other health care
providers in the screening market. The Company's product sales to the United
States monitoring market were minimal in each fiscal year. The Company expects
that international revenues will continue to decline as a percentage of total
revenues in future periods as the Company increases sales and marketing efforts
in the monitoring market in the United States.
COSTS OF PRODUCTS SOLD. Costs of products sold increased 14.5% from $3.9
million in fiscal 1995 to $4.5 million in fiscal 1996, as unit sales of the
L-D-X Analyzer and test cassettes increased. Gross margin was 2.6% and 34.5% in
fiscal 1995 and 1996, respectively. The improvement in the gross margin was
primarily attributable to improved cassette manufacturing yields, improved
quality assurance procedures and growth in the volume of units sold. During
fiscal 1995, the Company improved cassette manufacturing yields and quality
assurance procedures and reduced staffing levels by eliminating technical and
engineering positions specific to initial product development and scale-up of
manufacturing capacity. The resulting manufacturing efficiencies and cost
reductions were reflected for the full year of fiscal 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses remained
constant between fiscal 1995 and fiscal 1996 as a result of the Company's
decision to concentrate available resources on expansion of sales and marketing
activities for existing test panels. However, the Company believes that its
future revenue growth and profitability will depend, in part, upon its ability
to complete development
20
<PAGE>
and successfully introduce new test panels designed to extend the L-D-X System's
capabilities to include additional tests useful in the screening and monitoring
markets. The Company is currently developing additional tests to detect disease
states such as metabolic bone diseases and disorders, prostate cancer and
diabetes. Each of these new tests is at an early stage of development and the
Company will be required to undertake time consuming and costly development
activities and seek regulatory approval for these new tests. As a result, the
Company currently anticipates that research and development expenditures will
increase significantly in future periods as product development and
manufacturing scale-up efforts for new tests increase.
SALES AND MARKETING. Sales and marketing expenses increased 17.6% from $2.7
million in fiscal 1995 to $3.2 million in fiscal 1996. The increase in sales and
marketing expenses was primarily attributable to expansion of the Company's
domestic direct sales and marketing organization, increased commissions
associated with increased product sales and, to a lesser extent, participation
in domestic conferences and trade shows. The Company currently anticipates that
sales and marketing expenses will increase in future periods as the Company
expands sales and marketing activities to address the monitoring market, in
particular the POL segment of the monitoring market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
30.6% from $2.0 million in fiscal 1995 to $1.4 million in fiscal 1996. The
decrease in general and administrative expenses was primarily a result of
reduced headcount and reduced expenditures for rent and insurance. In fiscal
1995, general and administrative expenses included a one-time charge of
approximately $114,000 as a result of headcount reductions. Absent such one-time
charge, general and administrative expenses for fiscal 1995 would have been $1.9
million.
INTEREST INCOME (EXPENSE), NET. Interest income was earned on investment of
cash balances generated from prior equity financings of the Company. Interest
expense was incurred on capital lease financings, the bank line of credit and
long-term debt obtained by the Company.
YEARS ENDED MARCH 31, 1994 AND 1995
REVENUES. Revenues increased 33.3% from $3.0 million in fiscal 1994 to $4.0
million in fiscal year 1995. Domestic revenues increased by 74.6% from $1.8
million in fiscal 1994 to $3.2 million in fiscal 1995, while international
revenues decreased by 31.1% from $1.2 million in fiscal 1994 to $817,000 in
fiscal 1995. The increase in domestic revenues reflected an increase in sales of
diagnostic tests to the domestic screening market. The decrease in international
revenues reflected the completion in fiscal 1994 of the Company's promotional
activities with Warner Lambert/Parke Davis Corporation ("Warner Lambert") in
Italy relating to Warner Lambert's hypolipidemic agent, Lopid.
COSTS OF PRODUCTS SOLD. Costs of products sold decreased 20.9% from $5.0
million in fiscal 1994 to $3.9 million in fiscal 1995. Costs of products sold as
a percentage of total revenues decreased from 164.1% in fiscal 1994 to 97.4% in
fiscal 1995. The decrease was primarily attributable to the Company's successful
completion of efforts to improve cassette manufacturing yields and improve
quality assurance procedures. The improvements in cassette manufacturing and
quality assurance procedures enabled the Company to reduce staffing levels by
eliminating technical and engineering positions specific to initial product
development and expansion of the Company's manufacturing capacity.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 66.5%
from $2.1 million in fiscal 1994 to $715,000 in fiscal 1995. The decrease in
research and development expenses was primarily a result of completing the
development of, and obtaining FDA approval for, a TC/HDL/Glucose test and a
Lipid Profile plus Glucose test and, transitioning to product marketing in
fiscal 1995 from product development in fiscal 1994. The fiscal 1995 expenses
included $715,000 for new product development and product enhancements to meet
customer demands while fiscal 1994 expenses included $733,000 for manufacturing
scale-up costs and $1.4 million related to continued development of the L-D-X
System and its related products.
SALES AND MARKETING. Sales and marketing expenses decreased 7.4% from $2.9
million in fiscal 1994 to $2.7 million in fiscal 1995. The decrease in sales and
marketing expenses was a direct result of the
21
<PAGE>
Company's efforts to improve efficiency. During fiscal 1995, the Company focused
on increasing domestic product sales while selectively targeting potential
sources of international product sales. The strategy allowed the Company to
reduce sales and marketing expenses in fiscal 1995 although product sales
increased.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 13.3% from $2.3 million in fiscal 1994 to $2.0 million in fiscal 1995.
General and administrative expenses for fiscal 1995 included a one-time charge
of approximately $114,000 due to a reduction in the number of administrative
personnel. Absent such one-time charge, general and administrative expenses for
fiscal 1995 would have been $1,869,000. In addition, fiscal 1994 expenses
included a net gain of $290,000 upon the settlement of a dispute in connection
with a licensing agreement. Absent such net gain, general and administrative
expenses for fiscal 1994 would have been $2.6 million. After consideration of
the net gain and one-time charge, actual general and administrative expenses for
fiscal 1995 decreased approximately $709,000 or 28% from fiscal 1994. The
decrease resulted from the Company's efforts to control costs and conserve
resources through reduced headcount and improved operating efficiency.
INTEREST INCOME (EXPENSE), NET. Interest income was earned on investment of
cash balances generated from equity financings of the Company. Interest expense
was incurred on capital lease financings obtained by the Company.
INCOME TAX CARRYFORWARDS
As of March 31, 1996, the Company had net operating loss carryforwards
available to reduce taxable income through 2011 for federal and state income tax
purposes of approximately $46.0 million and $21.0 million, respectively.
Additionally, the Company had research and development credit carryforwards
available to reduce income taxes through 2011 for federal and state income tax
purposes of approximately $1.5 million and $493,000, respectively. There is an
annual limitation of approximately $1.5 million for federal and state income tax
reporting purposes on the use of approximately $8.1 million and $1.1 million of
net operating losses, and of $390,000 and $160,000 of tax credit carryforwards,
respectively. The Company's net operating losses and tax credit carryforwards
incurred prior to December 1992 are subject to an annual limitation of
approximately $5.5 million for federal and state income tax reporting purposes
on the use of approximately $28.2 million and $8.1 million of net operating loss
carryforwards, respectively, and of $1.2 million and $379,000 of tax credit
carryforwards, respectively. If the amount of these limitations are not utilized
in any year, the amount not utilized increases the allowable limit in the
subsequent year.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121")
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be recognized.
The Company will adopt FAS 121 during fiscal 1997 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will adopt FAS 123 during fiscal 1997. The Company
intends to continue to account for employee stock options using the intrinsic
value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only"
pro forma alternative described in FAS 123.
22
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results will fluctuate due to numerous factors, including the timing and level
of market acceptance of the L-D-X System, particularly with respect to POLs, the
timing of introduction and availability of new tests, the timing and level of
expenditures associated with new product development activities, the timing and
level of expenditure associated with expansion of sales and marketing activities
and overall operations, the Company's ability to cost-effectively expand
cassette manufacturing capacity and maintain consistently acceptable yields in
the manufacture of cassettes, the timing of establishment of strategic
distribution arrangements and success of the activities conducted under such
arrangements, variations in manufacturing efficiencies, changes in demand for
its products based on changes in third party reimbursement, competition, changes
in government regulation and other factors, the timing of significant orders
from and shipments to customers, and general economic conditions. These factors
are difficult to forecast, and these or other factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. Fluctuations in quarterly demand for products and order
cancellations may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning, disrupt cash flow from
operations and contribute to the volatility of the Company's stock price. The
Company's expenses are based in part on the Company's expectations as to future
revenue levels and to a large extent are fixed in the short-term. If actual
revenues do not meet expectations, the Company's business, financial condition
and results of operations could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities and, to a lesser extent, through capital lease financings and a long
term note payable. Through March 31, 1996, the Company had received
approximately $54.9 million in net proceeds from equity financings. As of March
31, 1996, the Company had approximately $361,000 of cash and cash equivalents.
In addition, the Company had $3.75 million of restricted marketable securities
that currently secure a $3.0 million revolving bank line of credit. While the
line of credit is in effect, the Company is required to maintain on deposit with
the bank $3.75 million of restricted marketable securities or a $3.0 million
certificate of deposit as pledged collateral, restricted as to use when the
Company has outstanding borrowings under the agreement. The line of credit
expires on October 31, 1996. As of March 31, 1996, borrowings under the line of
credit totaled $250,000. If the Company's cash and restricted marketable
securities were to fall below $3.0 million, the Company would be required to
either renegotiate the terms or cancel the revolving line of credit. At March
31, 1996, the Company also had approximately $1.3 million outstanding under a
long term note. The note contains various provisions including requirements that
the Company maintain at least $3.0 million in cash and restricted marketable
securities and a security deposit in the amount of $150,000 payable to the
lender in the event of a default on the note. If the Company's cash and
restricted marketable securities were to fall below $3.0 million, the Company
would be required to deposit with the lender an additional $200,000 as a
security deposit.
Net cash used in operating activities was approximately $7.2 million, $5.0
million and $2.4 million in fiscal 1994, 1995 and 1996, respectively. Cash used
in operating activities resulted primarily from net losses. Net cash provided by
investing activities in fiscal 1995 resulted primarily from the sales of
marketable securities. During fiscal 1996, net cash used in investing activities
reflected the Company's purchases of property and equipment. Net cash used in
financing activities in fiscal 1995 reflected the repayment of capital lease
obligations, while the net cash provided by financing activities in fiscal 1996
reflected approximately $1.7 million in net proceeds from a note payable,
borrowing under the line of credit and issuances of Common Stock.
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity and other working capital and general corporate purposes.
Although the Company believes that the net proceeds of the Offering,
23
<PAGE>
together with its unrestricted cash balances, internally generated funds, bank
borrowings under existing lines of credit and proceeds from issuances of Common
Stock to Metra Biosystems, will be sufficient to meet its capital requirements
for the foreseeable future, there can be no assurance that the Company will not
require additional financing. The Company's actual liquidity and capital
requirements will depend upon numerous additional factors, including the costs
and timing of expansion of manufacturing capacity, the number and type of new
tests the Company seeks to develop, the costs and timing of expansion of sales
and marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the progress of commercialization efforts of the Company's
distributors, the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights, developments
related to regulatory and third party reimbursement matters and CLIA, and other
factors. In the event that additional financing is needed, the Company may seek
to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that such financing, if required, will be available on satisfactory
terms, if at all.
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BUSINESS
GENERAL
Cholestech develops, manufactures and markets a proprietary point of care
diagnostic system which measures specific analytes to detect various diseases
and disorders within five minutes using a single drop of whole blood. The
Company currently markets its L-D-X- System and a series of lipid and glucose
panels for preventive screening and monitoring applications. In January 1996,
the L-D-X System and the Company's TC, HDL, triglycerides and glucose tests were
granted waived status under CLIA, the first such waiver granted under CLIA's
newly-developed ease of use, accuracy and precision guidelines. The CLIA waiver
allows health care providers to use the L-D-X System without the additional
operating costs and extensive regulatory requirements associated with CLIA
compliance. The Company believes that the L-D-X- System is the only
multi-analyte diagnostic system to be classified as waived under CLIA. The
Company believes that the L-D-X System's CLIA waived status, technological
flexibility, ease of use, accuracy and low maintenance costs provide it with
competitive advantages over other point of care diagnostic systems.
MARKET OVERVIEW
Diagnostic testing of blood for chronic diseases and disorders is typically
performed in independent clinical laboratories or hospital-based laboratories
where large numbers of blood samples are processed in batches and test results
are often not returned to physicians in less than 24 hours. The Company believes
that as a result of the potential benefits and advantages of point of care
testing , there exists an opportunity to shift certain types of diagnositc
testing from clinical laboratories and hospital-based laboratories to the point
of care. These potential benefits and advantages include permitting the health
care practitioner to provide immediate feedback to the patient as well as
allowing health care practitioners to closely monitor the therapeutic
effectiveness of treatment and thereby improve patient compliance. The Company
also believes that point of care testing could help to reduce overall delivery
costs and could improve patient outcomes by providing diagnosis as close to the
patient as possible, thereby eliminating the need for additional patient
follow-up with test results and redundant and time consuming procedures and
processes, reducing paperwork and minimizing the time to medical intervention.
Two of the principal markets in which point of care testing is performed are
the screening and monitoring markets. The screening market is generally
comprised of hospitals, corporate wellness programs, health promotion service
providers, managed care organizations, community health centers, public health
programs, fitness centers, the military and other independent screeners. These
health care providers focus on identifying patients who may be at risk for
certain diseases or disorders and directing them to appropriate therapeutic or
preventive care programs. The monitoring market is generally comprised of POLs,
lipid clinics, cardiac rehabilitation centers and pharmacies. These health care
providers focus on disease management and perform testing to monitor (i)
patients who are identified as at risk for certain diseases, (ii) patients on
dietary or drug therapy, and (iii) patients at risk of, or who have suffered,
heart attacks or who are in cardiac rehabilitation. The Company believes that
the number of potential point of care testing sites is large. For example, the
NCEP and American Heart Association have encouraged cholesterol testing in such
places as worksites, community health centers and a variety of preventive
medicine programs in order to make such testing readily available. Until
recently, point of care testing has been conducted predominately in the high
volume screening settings. Point of care testing in the monitoring market has
been embraced by low volume POLs only on a limited basis due to the costs and
administrative burdens associated with government regulatory requirements. In
addition, technological limitations have restricted the number of tests which
can be performed cost effectively at the point of care.
Historically, the Federal Clinical Laboratory Improvement Amendments of 1967
applied only to clinical and hospital-based laboratories, and physicians were
able to perform any laboratory testing that they believed was appropriate for
their patients. The POL market grew as a result of the development of easy to
use laboratory testing equipment and the economic incentives for physicians to
perform such
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testing in their own offices. In 1988, the regulatory environment in the POL
market changed with the promulgation of CLIA which applied to all laboratories
including POLs, which perform testing on human specimens. Under CLIA, all
laboratories are required to register with the Health Care Financing
Administration ("HCFA"), but laboratories conducting non-waived tests must pay
higher registration fees and submit to biannual federal inspections.
Laboratories conducting non-waived tests are also required to implement a
comprehensive quality assurance program, which includes a detailed procedure
manual, enrollment in a proficiency testing program and a requirement to run two
levels of quality control material each day of testing, even if only one patient
sample is run. Moreover, CLIA regulations include personnel requirements that
vary depending on the complexity of tests performed. See "-- Government
Regulation." Since POL testing is often done in low volumes and CLIA
requirements can significantly increase the costs of testing, performing
non-waived tests in a POL setting is often not cost effective. When CLIA
regulations went into effect in 1992, many physicians discontinued all but
waived testing. Clinical and hospital-based laboratories, however, have
continued to perform such testing and as a result currently dominate this
market.
SCREENING MARKET
In the screening market, health care providers perform high volume
preventive risk factor screening, particularly for cholesterol and glucose.
Although not subject to reimbursement by Medicare or other third party payors,
risk factor screening has proven to be an effective way to decrease the overall
cost of medical care. Hospitals and health departments offer health screening in
local communities. Many corporations (70% of the corporations with greater than
5,000 employees) offer periodic cholesterol screenings to their employees at the
worksite as part of worksite health promotion programs. Of those companies
providing cholesterol screenings, approximately 30% also measure glucose.
Worksite health promotion is advocated by government agencies such as the
National Heart, Lung and Blood Institute and the Centers for Disease Control and
Prevention ("CDC"). In addition, private organizations promote worksite health
promotion with a variety of programs such as the American Heart Association's
"Heart at Work" Program and the YMCA's "Corporate Health Enhancement Program,"
which serves more than 2,000 worksites nationally. The Public Health Service has
set goals for the number of worksites offering cholesterol education and testing
to be increased from 16% in 1983 to 50% by the year 2000. Due to the high volume
of testing performed by health care providers in the screening market, the
adoption of CLIA and its resulting cost increases and administrative burdens did
not have a significant negative impact on testing in the screening market. Since
CLIA went into effect in 1992, the Company has focused its sales and marketing
efforts on the distribution of its products into the various segments of the
screening market.
MONITORING MARKET
Since the Company received notice from the CDC in January 1996 that the
L-D-X System and the TC, HDL, triglycerides and glucose tests in any combination
have been classified as waived under CLIA, the Company has expanded its sales
and marketing focus to include the monitoring market, in particular the POL and
pharmacy segments. There are currently 54,000 POLs which perform different types
of diagnostic tests. The Company currently offers four of the eight most common
blood chemistry tests performed at POLs, with two additional tests under
development. In addition, there are currently 68,000 pharmacies which could
potentially offer point of care testing. The Company believes that long term
success in the pharmacy market will be dependent upon the development of patient
monitoring programs developed by pharmacies and implemented with managed care
practitioners and physicians on a local basis.
STRATEGY
The Company's business strategy includes the following elements:
- LEVERAGE CORE TECHNOLOGIES TO ENHANCE PRODUCT OFFERINGS. The Company
intends to leverage the technological flexibility of the L-D-X System by
developing new test cassettes which utilize the existing L-D-X Analyzer in
order to capitalize on the Company's installed based of instruments
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as well as to make the L-D-X System more attractive to new customers. The
Company is currently in various stages of development of new products
which utilize biological markers for screening and monitoring certain
common diseases, such as metabolic bone diseases and disorders, prostate
cancer and diabetes. In addition, the Company is developing new tests for
blood urea nitrogen, uric acid and creatinine for renal function analysis
and liver enzymes for hepatic damage.
- INCREASE PENETRATION OF SCREENING MARKET AND EXPAND INTO MONITORING
MARKET. The Company believes that the CLIA waived status of its products
will increase the number of potential customers in the screening market,
and will enable the Company to access the monitoring market. The Company
is currently developing new products to make its product line more
attractive to the POL market as well as to expand its screening market
offerings.
- EXPAND DISTRIBUTION CHANNELS. The Company intends to augment its direct
sales and marketing efforts by continuing to establish relationships with
selected third party distributors to strategically access target markets.
The Company has recently entered into a distribution agreement with PSS,
one of the largest medical products distributors in the United States, to
sell the L-D-X System to the POL market.
- ESTABLISH STRATEGIC RELATIONSHIPS. The Company has established and intends
to continue to establish strategic relationships to develop new products
and to expand its customer base. The Company believes that such
relationships will enable it to take advantage of the financial resources,
technological capabilities and market presence of its partners to enhance
its competitive position in the screening market and expanding into the
monitoring market. In May 1996 the Company entered into a development,
marketing and licensing agreement with Metra Biosystems to develop an
immunoassay test cassette incorporating Metra Biosystems' bone resorption
technology to be used with the L-D-X System. The Company is also
participating in a pilot program with the American Pharmaceutical
Association funded by Merck & Co. ("Merck") to demonstrate the ability of
pharmacists to improve patient outcomes with drug therapy and behavior
modification.
TECHNOLOGY
The L-D-X System is a self-contained, easy to use package of products
consisting of a versatile, telephone-sized electronic analyzer, a line of
disposable test cassettes, and accessories that enable a user to perform
combinations of blood tests in five minutes or less. Although no special user
training is needed and the test sample does not need to be pre-treated, the
Cholestech L-D-X System produces results that are comparable to the precision
and accuracy typically seen in larger, more expensive bench top and
laboratory-based analyzers. Correlation studies of the L-D-X System and clinical
laboratory analyzers have shown that the L-D-X System meets NCEP guidelines for
precision and accuracy. In addition, the ease of use and precision and accuracy
of the L-D-X System were factors necessary for the L-D-X System to receive
waived status under CLIA. The Company believes that it is the only manufacturer
with a CLIA waived multi-analyte diagnostic system.
The Company believes the L-D-X System provides the following benefits and
advantages:
- FLEXIBILITY OF L-D-X SYSTEM. The design of the L-D-X System incorporates
as much of the system's technology as possible into the test cassettes and
maintains the L-D-X Analyzer as a flexible measuring device that can be
adapted as new tests and other product upgrades are introduced. As new
tests are marketed, encoding on the cassette's magnetic stripe
communicates the product change to the L-D-X Analyzer and provides the
L-D-X Analyzer the information needed to measure and display the test
results. Changes that cannot be captured on the cassette's magnetic stripe
can be accomplished by software changes in the L-D-X Analyzer's removable
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read only memory ("ROM") pack. This flexible design is intended to permit
the installed base of users to incorporate new tests and other product
upgrades to the L-D-X System without having to purchase a new analyzer.
- COST EFFECTIVENESS. The Company believes that point of care specimen
analysis made possible by the L-D-X System may provide savings to third
party payors and physicians. Point of care testing allows the health care
practitioner to provide immediate results to the patient, thereby
increasing the possibility for improved patient outcomes and eliminating
the requirement that the patient return to receive test results. In
addition, the Company believes that the L-D-X System's waived status under
CLIA, together with prevailing third party reimbursement rates and
recommended fees, may provide a financial incentive for health care
providers to test patients at the point of care and capture revenue rather
than forwarding it to the clinical laboratory.
- IMMEDIATE RESULTS. The L-D-X System provides the health care practitioner
with results in approximately five minutes, allowing for immediate point
of care risk factor analysis, diagnosis and monitoring. The immediacy of
the test results allows the practitioner to begin treatment during the
same visit, perform additional tests if needed or select an alternative
treatment. The L-D-X System's ability to provide immediate test results
also improves the usefulness of screening applications, such as worksite
testing programs.
- SIMULTANEOUS PERFORMANCE OF MULTIPLE TESTS. With the L-D-X System, a
single cassette can perform up to four tests simultaneously, enabling the
Company to develop test cassettes that meet specific market needs. In the
monitoring market, the performance of multiple tests with a single
cassette may also result in more reimbursement revenue for the physician.
- EASE OF USE. The L-D-X System requires no special medical or chemistry
training to operate and obtain test results. In addition, the L-D-X System
eliminates the need to pre-treat the testing sample.
- FEWER OPPORTUNITIES FOR ERROR. The L-D-X System eliminates many of the
steps traditionally involved in blood testing, including sample
transportation, preparation and storage, and interpretation of analyte
color reactions, thereby reducing opportunities for human error and
preserving the integrity of the sample.
L-D-X ANALYZER
The L-D-X Analyzer is a four-channel, reflectance photometer that measures
the amount of light reflected from the reaction surfaces and incorporates a
microprocessor with on board software. The L-D-X Analyzer contains an entry
drawer for insertion of the cassette, three buttons for user activation and a
liquid crystal display to present the test measurements. The L-D-X Analyzer can
also transmit results to a printer or laboratory management computer system for
data handling and record keeping. The L-D-X Analyzer includes cardiac risk
assessment software that allows the health care practitioner to perform cardiac
risk assessment using TC and HDL test results and information about other
cardiac risk factors the health care practitioner enters into the L-D-X
Analyzer.
To run a test, the health care provider presses the "run" button on the
L-D-X Analyzer to open the cassette drawer, applies the sample of whole blood
directly to the test cassette's sample well, inserts the cassette onto the
drawer and presses the run button again. All further steps are done by the L-D-X
Analyzer. Utilizing the information and instructions encoded on the cassette's
magnetic stripe, the L-D-X Analyzer's on board microprocessor controls the
reaction conditions, controls the optical measurements of analyte concentrations
on the cassette's reaction pads, executes the required calculations and, within
approximately five minutes, displays the quantitative results on the liquid
crystal display.
The ROM software that instructs and controls the operation of the L-D-X
Analyzer's on board microprocessor is contained in a removable ROM pack mounted
in an access well on the bottom of the L-D-X Analyzer. The Company intends to
upgrade the software in its ROM pack as the Company develops new products. A
user can then easily remove the ROM pack and replace it with a new ROM
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pack containing upgraded software. To date, the Company has made available to
existing users a new ROM pack, without charge, containing the cardiac risk
assessment software described above, as well as a new ROM pack, for a fee,
reflecting certain changes required to receive the CLIA waiver.
DISPOSABLE TEST CASSETTES
The focal point of the L-D-X System is the line of disposable test
cassettes, which incorporate patented technology, including a method for
distributing precisely measured plasma to multiple reaction pads for
simultaneous testing along with the technology to instruct the L-D-X Analyzer
how to perform the tests and all related calculations.
Each cassette consists of three parts: a main body that contains the sample
well into which the blood sample is dispensed, a reaction bar where plasma is
transferred for analysis, and a magnetic stripe encoded with test instructions
and lot specific calibration information for the various chemistries on the
reaction pads. Capillary action draws a drop of whole blood through a separation
medium within a cassette, stopping the cellular components of the blood while
transferring a small volume of plasma to the cassette's reaction pads. When the
plasma contacts the reaction pads, the dry chemistry on the reaction pads reacts
with the analyte(s) in the plasma producing color. The intensity of color
developed is proportional to the concentration of the analyte(s) in the plasma.
The magnetic stripe contains information needed by the L-D-X Analyzer to convert
the reflected color reading into a concentration level for the accurate
measurement of analytes being tested. This feature frees the user from having to
interpret any color reaction, relate a reading to a separate chart or input any
calibration information.
For certain future tests, the Company will be required to modify the design
of the existing dry chemistry cassette. For example, the Company's immunoassay
tests currently under development require the use of antibodies bound to the
reaction membrane and a wash step which removes bound reactants that would
interfere with the test. The new immunoassay cassette under development has the
same external dimensions as the currently available dry chemistry cassette, but
will require the Company to develop new technologies that would allow it to
perform an immunoassay test. The Company believes that, if the immunoassay
cassette is successfully developed, the L-D-X Analyzer will be the only
instrument capable of performing both dry chemistry and immunoassay-based tests
on a single instrument. See "-- Products -- Products Under Development."
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PRODUCTS
The Company's current products include the L-D-X Analyzer and a series of
lipid and glucose test cassettes for the screening and monitoring markets. In
addition, the Company is in the process of developing new tests to expand its
product menu, including immunoassay-based test cassettes to provide preventive
monitoring assays for the detection of metabolic bone diseases and disorders and
prostate cancer. The following table summarizes the Company's current cassette
products and products under development:
<TABLE>
<CAPTION>
L-D-X TEST APPLICATION TEST TYPE STATUS (1)
- ----------------------- ----------------------- ------------ -----------------------
CURRENT PRODUCTS
<S> <C> <C> <C>
TC Cardiac Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
TC and HDL Cardiac Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
Lipid Profile (TC/HDL/ Cardiac Risk Dry Marketed; FDA cleared;
Triglycerides) Chemistry CLIA waived
TC and Glucose Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
TC/HDL/Glucose Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
Lipid Profile plus Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Glucose Chemistry CLIA waived
PRODUCTS UNDER
DEVELOPMENT
Bone Markers Osteoporosis Immunoassay Prototype Stage
Uric Acid Renal Function Dry Feasibility Studies
Chemistry
Blood Urea Nitrogen Renal Function Dry Feasibility Studies
Chemistry
Creatinine Renal Function Dry Feasibility Studies
Chemistry
Prostate Specific Prostate Disease Immunoassay Feasibility Studies
Antigen
Glycated Hemoglobin Diabetes Specific Feasibility Studies
Binding
</TABLE>
(1) "Marketed" means that commercial sales of the product have commenced. "FDA
cleared" means that the product has received 510(k) clearance from the FDA.
"CLIA waived" means that the product has been classified as waived under
CLIA by the CDC. "Feasibility studies" means that a theoretical design for
the product has been developed and the test chemistry is being evaluated in
the laboratory. "Prototype stage" means cassette shelf-life is being
evaluated, pilot manufacturing equipment is being developed, and the new
test is being evaluated in-house against samples designed to mimic the range
of real patient samples.
CURRENT PRODUCTS
The Company's current products are designed to measure and monitor blood
cholesterol and related lipids and glucose. Lipids travel in the blood within
water-soluble particles called lipoproteins. These lipid carriers include VLDL
(very-low-density lipoproteins), LDL (low-density lipoproteins) and HDL (high
density lipoproteins). VLDL, a major carrier of triglycerides in the blood, and
LDL, the major carrier of cholesterol, have been shown to be associated with
deposits on the arterial wall, which are sometimes referred to as
atherosclerotic plaque. The accumulation of this plaque leads to a narrowing of
the arteries and increases the likelihood of coronary heart disease, the leading
cause of death in the United States. HDL particles, which circulate in the blood
and can pick up cholesterol from arteries and carry it to the liver for
elimination from the body, counterbalance this mechanism. HDL is sometimes
called "good cholesterol" because of this function. The development of coronary
heart disease has been associated with three lipoprotein abnormalities: (i) high
levels of LDL; (ii) high levels of VLDL; and (iii) low levels of HDL.
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Recognizing the relationship between diabetes and dyslipidemia (abnormal
lipid levels), Cholestech developed a glucose test for the L-D-X System.
Diabetes is a complex disorder of carbohydrate, fat and protein metabolism. It
is manifested by a relative or absolute deficiency in insulin, the hormone that
facilitates and controls the use of glucose by the body. Because of the
deficiency of insulin, diabetic patients have an impaired tolerance to glucose,
which leads to a number of short term and long term complications, such as nerve
damage, kidney disease and retinal damage.
The Company's L-D-X System includes the L-D-X Analyzer which measures
analyte concentrations on the test cassette and displays the quantitative
results. The L-D-X Analyzer currently has a list price of $1,795. A description
of the Company's test cassettes is provided below.
TC. A stand alone test for measuring total cholesterol. The TC test
currently has a list price of $2.95.
TC AND HDL PANEL. The total cholesterol and HDL cholesterol panel provides
results for TC and HDL and calculates the ratio of TC to HDL, a recognized
measure of lipid-induced cardiac risk. The Company believes that the TC and HDL
Panel is the only currently available point of care test which, using only a
single drop of whole blood from a simple fingerstick, addresses the NIH
guidelines regarding the evaluation of coronary heart disease through the
testing of not only TC, but also the important HDL component. As a result, the
Company believes the TC and HDL Panel is particularly useful in corporate
wellness and initial screening applications. The TC and HDL Panel currently has
a list price of $7.50.
LIPID PROFILE. The Company offers a Lipid Profile which directly measures
TC, HDL and triglycerides. In addition to providing direct results for TC, HDL
and triglycerides, the Lipid Profile calculates estimated values for LDL and
VLDL and calculates the ratio of TC to HDL. The Lipid Profile thus performs,
using a small sample of whole blood from a simple fingerstick, each test
identified by the NIH guidelines as important in the diagnosis and ongoing
monitoring of individuals who have high TC levels or who exhibit two or more
other coronary heart disease risk factors. The Lipid Profile also allows the
health care practitioner to follow the NIH guidelines to perform three lipid
profiles, each one week apart, prior to initiating drug or dietary therapy. The
Lipid Profile currently has a list price of $9.95.
TC AND GLUCOSE PANEL, TC/HDL/GLUCOSE PANEL AND LIPID PROFILE PLUS
GLUCOSE. These panels address the need for screening and monitoring patients
with demonstrated or incipient diabetes mellitus and individuals who may be at
risk of cardiovascular disease and individuals who may not be aware that they
are diabetic. These test combinations are potentially desirable because glucose
and TC tests are frequently conducted at occupational health sites. The TC and
Glucose Panel, the TC/HDL/Glucose Panel and the Lipid Profile plus Glucose have
a list price of $3.95, $8.50 and $10.95, respectively.
MARKETS. In response to conclusive evidence relating high TC to heart
disease, the NIH in 1985 launched the NCEP, a nationwide effort to reduce the
prevalence of high blood cholesterol. In 1988, the NCEP issued guidelines for
the testing of all adults over 20 years of age for high blood cholesterol, and
more extensive lipid monitoring and treatment for those found to be in high risk
categories. Testing guidelines were subsequently expanded to include children
over the age of two with a family history of high blood cholesterol or coronary
heart disease and to include in certain circumstances a lipid profile,
consisting of TC, HDL, LDL and triglycerides. Since the NCEP initiated its
recommendations, the market for cholesterol and other lipid tests has
experienced significant growth. NCEP data indicate that more than 50% of the
adult population in the United States has high or borderline high TC. The
Company estimates that more than 200 million lipid tests were performed in the
United States in 1992.
It is estimated that Type II diabetes, which involves insulin deficiency or
insulin resistance, afflicts more than 15 million persons in the United States,
but only half of those with Type II diabetes have been identified. Screening for
these patients who have non-symptomatic diabetes is important, because proper
treatment will minimize the long term complications of the disease.
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PRODUCTS UNDER DEVELOPMENT
The Company's strategy is to use the technological flexibility of the L-D-X
System to develop new
cassettes that address disease states and testing markets the Company believes
provide attractive commercial opportunities. The Company is in the early stages
of developing new cassettes that would expand its product line in the screening
market and would better position its product line for the POL market. To date,
the Company has been engaged primarily in conducting research and development to
determine the feasibility of performing these new tests on the L-D-X System. The
Company will initially focus its available resources on the development of uric
acid, blood urea nitrogen, creatinine and liver enzyme tests, as well as the
immunoassay-based test to detect and monitor metabolic bone diseases and
disorders being developed in conjunction with Metra Biosystems. The Company will
undertake the development of additional tests depending on the progress of its
existing development efforts and its available resources. To complete its
product development programs, particularly with respect to the immunoassays, the
Company may be required to develop new core technologies, processes and
production equipment. In addition, the Company may also be required to retain
additional scientific, engineering and manufacturing staff. There can be no
assurance that the Company will be successful in developing any of the tests
described below, or even if successfully developed, that such tests will receive
regulatory clearance, be capable of being cost effectively manufactured in
sufficient quantities, on a timely basis and in compliance with regulatory
guidelines, or be successfully marketed. The Company intends to design and
develop most of these products so as to be eligible for FDA 510(k) clearance and
waivers under CLIA, although there can be no assurance that the Company's
products under development will obtain such clearances or waivers. See "Risk
Factors -- Government Regulation."
Products currently being developed by the Company are described below.
METABOLIC BONE DISEASES AND DISORDERS. Osteoporosis is the most widespread
form of bone disease characterized by a general loss of bone density. This loss
of bone density can lead to a weakening of the bone, thereby making the bone
more prone to fractures. Biological markers of bone metabolism are secreted in
urine, and it has been shown that the level of secretion correlates to the
amount of bone loss. The measured levels of these markers has also been shown to
be responsive to osteoporosis therapies such as hormone replacement. According
to the National Osteoporosis Foundation, this disease afflicts over 25 million
Americans and over 200 million people worldwide. In the United States,
approximately 1.5 million osteoporosis related fractures occur each year. For
Caucasian women, it is estimated that the risk of hip fractures approximates the
combined risks of breast, endometrial and ovarian cancers. The World Health
Organization estimates that the cost of osteoporosis related fractures in the
United States exceeds $7 billion annually.
The Company has entered into an agreement with Metra Biosystems to develop
and market Metra Biosystems' Pyrilinks-D and other related bone marker
technologies on the L-D-X System. The Company has successfully demonstrated the
feasibility of meeting the initial specifications for the Company's technology
for this urine-based immunoassay on the L-D-X System and is in the prototype
stage of development.
RENAL FUNCTION TESTS. The Company is developing a menu expansion of tests
to include tests for uric acid, blood urea nitrogen and creatinine for the
physician's office. The Company believes that these tests are among the most
commonly ordered tests in physician offices. Uric acid elevations occur in renal
diseases as well as gout, and low uric acid levels are sometimes associated with
diabetes and severe liver disease. Blood urea nitrogen elevations occur in
chronic renal disease as well as urinary tract obstruction. Blood urea nitrogen
is useful to monitor hemodialysis and other therapies. Creatinine is also a
measure of renal function and is used in combination with uric acid and blood
urea nitrogen tests. In addition, creatinine is used as a measure of renal blood
flow which may have become reduced due to congestive heart failure or
dehydration. Low levels of creatinine may result from decreased hepatic
production in advanced liver disease. The Company is currently conducting
feasibility studies for each of these tests.
PROSTATE SPECIFIC ANTIGEN (PSA). The American Cancer Society estimates that
in 1996, 317,000 Americans will be diagnosed with prostate cancer and predicts
that deaths from prostate cancer in the
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United States will reach over 41,000 making it the second leading cause of
cancer related deaths. The American Cancer Society recommends that men 50 and
older receive a PSA blood test annually. By making early detection possible,
treatment can begin when there is a higher likelihood of success, leading to
better survival rates from the disease. The Company has demonstrated the
feasibility of measuring PSA from a single drop of whole blood using the
Company's technology. The Company expects that the PSA test may require PMA
approval from the FDA.
GLYCATED HEMOGLOBIN. Glycated hemoglobin measurement is used by physicians
to assess a diabetic's long term compliance with prescribed diet and insulin
usage. This test measures the percent of the patient's hemoglobin which has
become coupled to glucose. A relatively high percentage of hemoglobin to glucose
indicates poor patient compliance, which can lead to severe health problems. The
American Diabetes Association ("ADA") recommends at least semi-annual
measurement for all diabetic patients. It is estimated that there are seven to
eight million diagnosed diabetics in the United States.
The Company has been notified by the U.S. Department of Health and Human
Services that it will receive a "Small Business Innovative Research" grant of
$100,000 to further develop this test on the L-D-X System. The Company is
currently evaluating the feasibility of a test to detect glycated hemoglobin on
the L-D-X System.
OTHER PRODUCTS UNDER DEVELOPMENT. The Company currently sells two cassettes
which can calculate LDL cholesterol levels from the combined readings of TC, HDL
and triglycerides. LDL cholesterol is the fraction of TC which leads to heart
disease and is referred to as "bad" cholesterol. There is now available a direct
version of the LDL test, and the Company is considering adapting this form of
the test to the L-D-X System. The advantage of this direct test over the
calculated version of the test is that it does not require the patient to fast
before testing. However, since lipid management requires the physician to assess
a patient treatment on both "good" and "bad" cholesterol, the disadvantage of
the stand alone direct LDL test is the lack of the patient's HDL values. The
Company believes that the L-D-X System may overcome this problem with its
ability to run multiple tests simultaneously on the system.
The Company is currently evaluating the feasibility of a test to detect the
levels of liver enzymes in whole blood. Liver enzymes are measures of hepatic
damage which may be caused by a number of diseases and/or chemical toxicities.
The ability to monitor the levels of liver enzymes is important because a large
number of drugs, including cholesterol lowering drugs, can cause liver damage.
The Company believes that a liver enzyme test would complement its lipid
diagnostic products.
Lp(a) is a lipoprotein which is a component of LDL. It has been established
in the scientific literature that Lp(a) is a risk factor for atherosclerosis,
and it is believed that Lp(a) may be the component of LDL which is responsible
for the risk associated with LDL. The Company believes that a test for Lp(a) may
emerge as the dominate test for cardiac risk in the future. The Company has
licensed the rights to a new technology to measure Lp(a). This technology is
currently being evaluated by the Company and a number of collaborators.
There can be no assurance that the Company will be able to complete
successful development of any of these future products. Furthermore, there can
be no assurance that even if these products and/or any other future products are
successfully developed, the Company will be able to successfully receive FDA
clearance or approval or CLIA waivers on a timely basis, manufacture such
products on a cost effective basis and in compliance with applicable regulatory
standards, or successfully market these products. See "Risk Factors --
Dependence on Development and Introduction of New Products."
SALES AND MARKETING
To date, the Company has focused its sales and marketing efforts on
hospitals, managed care organizations, large physician group practices,
corporate wellness programs, community health centers, health promotion service
providers and other independent screeners in the screening market. With the
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recent CLIA waiver of its existing product line, the Company believes that it
has a significant opportunity to access the monitoring market. The Company
utilizes a combination of a direct sales force and regional distributors to sell
into the screening market and is developing a national distribution network to
access the monitoring market.
The Company provides continuing customer support, including an automated
order entry system, and technical support whenever needed to promote customer
satisfaction. A U.S. toll-free number gives the customer immediate access to
Cholestech's in-house customer service and technical support group. Customer
service representatives also assist customers to order cassettes and
accessories. The Company maintains an in-house instrument service capability
that provides repairs to instruments either under warranty or on a parts and
labor basis.
SCREENING MARKET
The Company's distribution strategy for the screening market is to sell both
directly to high volume customers and to selected regional distributors. The
Company believes that its products provide a cost effective, easy to use
alternative for preventive health care programs that are focused on identifying
high risk individuals with possible cardiovascular disease and diabetes and
enrolling them into appropriate disease intervention programs to reduce their
overall health risk.
The Company sells directly through a field sales group which includes nine
regional sales managers. In addition, the Company has established a
telemarketing effort to support large volume customers and utilizes direct mail
campaigns to increase demand for its products. The Company also has entered into
agreements with nine regional distributors that augment the Company's direct
sales efforts.
The Company's international distribution strategy for the screening market
is designed to opportunistically penetrate targeted geographical markets by
selling directly to individual distributors in those areas. The Company has
entered into agreements with several foreign distributors to distribute the
L-D-X System primarily in Europe and Latin America and is negotiating similar
agreements with other distributors in South and Central America.
MONITORING MARKET
The Company's sales and marketing efforts in the monitoring market will
initially be focused on the POL and pharmacy segments. To efficiently access the
54,000 POLs, the Company is negotiating with several national and regional
distributors. As of April 1, 1996, the Company entered into a national, non-
exclusive distribution agreement with PSS, a national medical products
distributor with more than 700 sales professionals who focus on the POL market.
The pharmacy market consists of 68,000 pharmacies which may provide point of
care testing. The Company believes that marketing success in the pharmacy market
will be dependent upon the development of patient monitoring programs
implemented in conjunction with managed care providers and physicians on a local
basis. In January 1996, the American Pharmaceutical Association announced
Project IMPACT (IMprove Persistence And Compliance to Therapy). Project IMPACT
is being funded by Merck, and its goal is to demonstrate the ability of
pharmacists to enhance patient outcomes with drug therapy and behavior
modification. The pilot program enlarges the pharmacist's role to one in which
the pharmacist monitors therapeutic effectiveness of medications and provides
counseling services to the patient. Utilizing pharmacists to provide such
services may result in both direct and indirect cost savings to the patient and
the patient's insurer. The Company is participating in Project IMPACT through
the use of its L-D-X System to monitor patients in this pharmacy-based
cholesterol management project. The Company intends to utilize the program to
evaluate the potential market for the L-D-X System among pharmacists. Project
IMPACT will monitor approximately 900 patients at 32 community-based pharmacies
across the country for a period of two years.
There can be no assurance that the Company will be able to penetrate the
monitoring market, including the POL or pharmacy segments, or that physicians
will use the L-D-X System instead of clinical laboratory services for the same
tests. See "Risk Factors -- Uncertainty of Market Acceptance of the L-D-X
System."
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STRATEGIC RELATIONSHIPS
The Company's strategy includes establishing strategic relationships to
develop new products, expand its customer base, and provide the Company with
technological, clinical, marketing, financial and other key resources.
In May 1996, the Company entered into a development, marketing and licensing
agreement with Metra Biosystems to develop an immunoassay test cassette
incorporating Metra Biosystems' bone resorption technology to be used with the
L-D-X System. Pursuant to the agreement, Metra Biosystems purchased 39,526
shares of the Company's Common Stock for an aggregate purchase price of $250,000
($6.325 per share) and is obligated to purchase $750,000 of additional shares of
Common Stock upon the completion of specified milestones by the Company. The
Company has granted Metra Biosystems registration rights in connection with
Metra Biosystems' purchase of the Company's Common Stock. See "Description of
Capital Stock -- Registration Rights."
In connection with the development of the immunoassay test cassette, Metra
Biosystems granted Cholestech a non-exclusive, royalty-bearing license to use,
make, sell, offer to sell, import or distribute the resulting cassette to assess
bone resorption, a gauge of the effectiveness of treatments of certain metabolic
diseases and disorders and certain future products worldwide (the "Metra
License"). The Company shall pay royalties to Metra Biosystems on the bone
resorption product and on products that stem from work done in the course of the
collaboration but do not incorporate any of Metra Biosystems' proprietary
technology. The parties will negotiate royalties on future Metra Biosystems
products as appropriate. Under the agreement, the Company will market the
immunoassay test through its existing distribution channels in the United
States. The Company and Metra Biosystems will work together to market and
distribute the tests internationally.
There can be no assurance that the Company will be successful in developing
a bone resorption test or any other product under this agreement, that this
agreement will not expire prior to its term, or that even if any products are
developed that they will be successfully marketed. The Company expects to enter
into additional strategic agreements in the future to develop, commercialize and
sell its current and future products. There can be no assurance that the Company
will be able to negotiate acceptable agreements in the future, or that such
relationships will be successful. In addition, there can be no assurance that
the Company's strategic partners will not pursue alternative competing
technologies or products. See "Risk Factors -- Limited Sales, Marketing and
Distribution Experiences; Dependence on Third Party Distributors."
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MANUFACTURING
The Company manufactures, tests, performs quality assurance, packages and
ships products at its 30,000 square foot facility located in Hayward,
California. The Company maintains control of those portions of the manufacturing
process that it believes are complex and provide important barriers to entry by
competitors. The production processes employed by the Company to manufacture
cassettes differ significantly from those employed in the manufacture of the
analyzer.
MANUFACTURE OF CASSETTES
The Company purchases chemicals, membranes and other raw materials from
third party suppliers and converts these raw materials, using proprietary
processes, into cassettes. The Company believes its proprietary processes and
custom-designed equipment are important components of its cassette manufacturing
operations. The Company has developed core manufacturing technologies, processes
and production machinery, including (i) membrane lamination and welding; (ii)
discrete membrane impregnation; (iii) on-line calibration; and (iv) software
control of the manufacturing process. The Company is currently in the process of
completing validation of the second cassette manufacturing line and expects the
line to be fully operational in mid-1996. In the event that cassette sales
volume significantly increases, the Company would be required to construct a
third cassette manufacturing line. There can be no assurance that such expansion
of cassette manufacturing capacity can be completed in a timely fashion, if
ever, and the failure to increase cassette manufacturing capacity on a cost
effective and timely basis would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Risks Associated with Cassette Manufacturing."
Cassette manufacturing yield (defined as the successful percentage
conversion of raw materials, through the manufacturing process, into functional
cassettes) is an important measure of the quality and robustness of the cassette
manufacturing process. Manufacturing of the cassettes is highly complex and
sensitive to a wide variety of factors, including variations and impurities in
the raw materials, performance of the manufacturing equipment and the level of
contaminants in the manufacturing environment. Incoming inspection of raw
materials, in-process controls, improved manufacturing equipment performance,
and better operator proficiency and training all contribute to improvements in
yield. Continuous improvement of process factors are key determinants of
manufacturing output and efficiency, product quality and reliability and overall
profitability. Although the Company believes that it has acceptable cassette
yields and should be able to maintain the current cassette yield in the future,
there can be no assurance that such improvement will be maintained or that the
Company will not suffer future periodic cassette yield problems in connection
with new or existing products. Failure to maintain the improvements in process
yield or failure to obtain acceptable yields on future products could have a
material adverse effect on the Company's business.
MANUFACTURE OF L-D-X ANALYZER
The analyzer employs a variety of subassemblies and components designed or
specified by the Company, including an optical element, microprocessors, circuit
boards, a liquid crystal display and other electrical components. These
components and subassemblies are manufactured by a variety of third parties and
are shipped to the Company for final assembly. The Company's manufacture of the
analyzer consists primarily of assembly, testing, inspection and packaging.
Testing consists of a burn-in period, functional tests and integrated system
testing using specially produced test cassettes. The Company believes it can
expand its current analyzer manufacturing capacity at minimal cost.
RAW MATERIALS; QUALITY ASSURANCE
Outside vendors provide Cholestech with subassemblies, components and raw
materials. These materials are purchased, inspected and tested by the Company's
quality control personnel. The Company's quality control personnel also perform
finished goods quality control and inspection and maintain documentation for
compliance with current good manufacturing practices (cGMP) and other government
manufacturing regulations. Cholestech's manufacturing facilities are subject to
periodic inspection by regulatory authorities. See "-- Government Regulation."
Certain key components and
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raw materials used in the manufacturing of the Company's products are currently
provided by single-source vendors pursuant to the Company's periodic purchase
orders. The Company believes that it maintains an adequate level of such
components and raw materials in inventory and believes that alternative sources
for such components and raw materials are available. However, any supply
interruption in a sole-sourced component or raw material would have a material
adverse effect on the Company's business once the inventory is depleted and
until a new source of supply were qualified. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's business. Because the Company is a
small customer of many of its suppliers, there can be no assurance that its
suppliers will devote adequate resources to supplying the Company's needs. See
"Risk Factors -- Dependence on Suppliers."
COMPETITION
The testing market in which the Company competes is intensely competitive.
The Company's competition consists mainly of independent clinical laboratories
and hospital-based laboratories, as well as with manufacturers of bench top and
other point of care analyzers. The substantial majority of diagnostic tests used
by physicians and other health care providers are currently performed by
clinical laboratories and hospital-based laboratories. The Company expects that
these laboratories will compete intensely to maintain their dominance in the
monitoring market. In order to achieve broad market acceptance for the L-D-X
System, the Company will be required to demonstrate that the L-D-X System is an
attractive alternative to the independent clinical laboratory and hospital-based
laboratory. This will require physicians to change their established means of
having such tests performed. There can be no assurance that the L-D-X System
will be able to compete with the testing services provided by these
laboratories. See "Risk Factors -- Uncertainty of Market Acceptance of L-D-X
System."
In addition, companies having a significant presence in the diagnostic
market, such as Abbott Laboratories, Clinical Diagnostic Systems, a division of
Johnson and Johnson which was formerly a division of Eastman Kodak Company, and
Boehringer Mannheim, have developed or are developing analyzers targeted for
point of care. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. In addition,
such competitors offer broader product lines than the Company, have greater name
recognition than the Company, and offer discounts as a competitive tactic. The
Company believes that it currently has a competitive advantage with the
classification of its existing products as waived under CLIA. The Company
expects that the reclassification of the L-D-X System as waived under CLIA will
result in competitors seeking to develop products that qualify for waived
classification. There can be no assurance that the Company's competitors will
not succeed in obtaining CLIA waived status for their products or in developing
or marketing technologies or products that are more effective and commercially
attractive than the Company's current or future products, or that would render
the Company's technology or products obsolete or noncompetitive.
The Company's products must compete effectively overall with the existing
and future products of its competitors primarily on the basis of the ability to
perform tests at point of care, ease of use, testing of multiple analytes from a
single sample, ability to conduct tests without a skilled technician or a blood
pretreatment step, the breadth of tests available, market presence, cost
effectiveness, precision, accuracy or immediacy of results. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. See "Business -- Products -- Products Under
Development -- Technology and -- Competition."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company pursues an active patenting policy to protect inventions and
technology which are important to its business. The Company owns eight United
States patents covering various aspects of the
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technology incorporated in its products, including the method for separating HDL
from other lipoproteins in a dry chemistry format, the basic design of the
testing cassette and the L-D-X Analyzer and the method of correcting for the
effects of substances that can interfere with testing of a blood sample. The
Company has also filed patent applications relating to its core inventions and
technology internationally under the Patent Cooperation Treaty and individual
foreign applications. The Company is also the licensee of one United States
patent relating to the measurement of Lp(a) and a number of third party patents
relating to its cassette technology.
The medical products industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and any potential
litigation can result in substantial loss or diversion of revenues of the
Company and could have a material adverse effect on the Company. There can be no
assurance that pending patent applications filed by the Company will be approved
or that the issued or pending patents will not be challenged or circumvented by
competitors. Notwithstanding the Company's active pursuit of patent protection,
the Company believes that its future success will depend primarily upon the
technical expertise, creative skills and management abilities of its officers,
directors and key employees rather than on patent ownership.
There can be no assurance that infringement claims will not be asserted by
other parties in the future, that in such event the Company will prevail or that
it will be able to obtain licenses on reasonable terms. Adverse determinations
in any litigation could subject the Company to significant liabilities and/ or
require the Company to seek licenses from third parties. If the Company is
unable to obtain necessary licenses or is unable to develop or implement
alternative technology, the Company may be unable to manufacture and sell the
affected products. Any of these outcomes could have a material adverse effect on
the Company's business.
The Company relies substantially on trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. The
Company works actively to foster continuing technological innovation to maintain
and protect its competitive position, and the Company has taken security
measures to protect its trade secrets and periodically explores ways to further
enhance trade secret security. There can be no assurance that such measures will
provide adequate protection for the Company's trade secrets or other proprietary
information. Although the Company has entered into proprietary information
agreements with its employees, consultants and advisors, there can be no
assurance that these agreements will have adequate remedies for any breach.
There can be no assurance that the Company's competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its right to its trade
secrets.
GOVERNMENT REGULATION
FDA REGULATIONS. The manufacture and sale of the Company's products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. Pursuant to the FDC
Act, the FDA regulates the clinical testing, manufacture, labeling, distribution
and promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g. labeling, premarket notification
and adherence to cGMPs). Class II devices are subject to general controls and to
special controls (e.g. performance
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standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are those that must receive premarket approval by
the FDA to assure their safety and effectiveness (e.g. life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices), and require
clinical testing to assure safety and effectiveness and FDA approval prior to
marketing and distribution.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a pre-market notification under
Section 510(k) of the FDC Act or an approval of a PMA application under Section
515 of the FDC Act. A 510(k) clearance typically will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device or to a Class III
medical device for which the FDA has not called for PMAs. A 510(k) notification
must contain information to support a claim of substantial equivalence, which
may include laboratory test results or the results of clinical studies of the
device in humans. It generally takes from four to twelve months from the date of
submission to obtain a 510(k) clearance, but it may take longer. A "not
substantially equivalent" determination by the FDA, or a request for additional
information, could delay the market introduction of new products that fall into
this category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. The L-D-X Analyzer and all existing test
cassettes required that the Company obtain 510(k) clearance prior to marketing
in the United States.
In general, the Company intends to develop and market tests that will
require no more than 510(k) clearance. However, if the Company cannot establish
that a proposed test cassette is substantially equivalent to a legally marketed
device, the Company must seek pre-market approval of the proposed test cassette
from the FDA through the submission of a PMA application. Certain products under
development, including the Prostate Specific Antigen test, may require
submission of a PMA application. A PMA application generally must contain the
results of clinical trials, the results of all relevant bench tests, laboratory
and animal studies, a complete description of the device and its components, and
a detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and training methods (if required). Upon
receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing. An
FDA review of a PMA application generally takes one to three years from the date
the PMA application is accepted for filing, but may take significantly longer.
Any products manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by FDA
and certain state agencies, including record keeping requirements and reporting
of adverse experience with the use of the device. Labeling and promotional
activities are subject to scrutiny by FDA and, in certain circumstances, by the
Federal Trade Commission. Current FDA enforcement policy prohibits the marketing
of approved medical devices for unapproved uses.
The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate compliance with cGMP. The FDA monitors compliance with these
requirements by requiring manufacturers to register with the FDA, which subjects
them to periodic inspections. While the Company's manufacturing processes,
facilities and practices have not been inspected by the FDA, the Company
believes that its manufacturing practices are in compliance with cGMP. The State
of California also regulates and inspects Cholestech's manufacturing facilities.
The Company has been inspected twice by the State of California to date and is
manufacturing under an issued medical device manufacturers facility license from
the State of California. If violations of the applicable regulations are noted
during FDA inspection of the Company's manufacturing facilities or the
manufacturing facilities of its contract manufacturers, the continued marketing
of the Company's product could be adversely affected.
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CLIA REGULATIONS. The use of the Company's products in the United States is
subject to CLIA, which provides for federal regulation of laboratory testing, an
activity also regulated by most states. Laboratories either must obtain a
registration certificate from HCFA, register with an approved accreditation
agency or obtain a state license in a state with a federally approved license
program. The CLIA regulations seek to ensure the quality of medical testing and
generally took effect in September 1992 with a two-year phase-in of certain
requirements. The three primary mechanisms to accomplish this goal are daily
quality control requirements to ensure the accuracy of laboratory devices and
procedures, proficiency testing to measure testing accuracy, and personnel
standards to assure appropriate training and experience for laboratory workers.
CLIA categorizes tests as "waived," or as being "moderately complex" or "highly
complex" on the basis of specific criteria.
Prior to January 1996, the L-D-X System, including all current cassettes,
was categorized under CLIA as moderately complex. In January 1996, the L-D-X
System and the TC, HDL, Triglycerides and Glucose tests in any combination were
reclassified as waived under CLIA. Under the waived classification, users are
only required to obtain a certificate of waiver from HCFA and pay a $100 fee.
This certificate must be renewed every two years. Current L-D-X System users,
including managed care organizations, hospitals, self-insured businesses and
health promotion organizations, will now be able to use the L-D-X System at a
lower cost. The Company provides United States purchasers of its products with
the documentation, systems and support necessary for the purchaser to comply
with CLIA. In order to successfully commercialize the tests that are currently
under development, the Company believes that it will be critical to obtain
waived classification for such tests under CLIA. There can be no assurance that
any new tests developed by the Company will qualify for the waived
classification. Any failure of the new tests to obtain waived status under CLIA
will adversely impact the Company's ability to commercialize such tests, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
any future amendment of CLIA or the promulgation of additional regulations
impacting laboratory testing will not have an adverse effect on the Company's
ability to market the L-D-X System. If CLIA regulations were modified in a
manner that reduced regulatory requirements and burdens faced by competitive
products, any competitive advantage of the L-D-X System's waived status would be
reduced or eliminated.
The public and the federal government have continued to focus significant
attention on reforming the health care system in the United States. A broad
range of health care reform measures have been suggested, and public discussion
of such measures will likely continue in the future. Certain of the preliminary
proposals entail spending limits, price controls, and limitations on increases
in insurance premiums. Although the Company believes the L-D-X System responds
to the concerns about such proposals by enabling delivery of quality medical
services at reduced costs, concern about such proposals has been reflected in
volatility of the stock prices of companies in health care and related
industries. The Company cannot predict which, if any, of such reform proposals
will be adopted, when they may be adopted or what impact they may have on the
Company. The adoption of certain of the proposals could have a material adverse
effect on the Company's operations.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Any applicable state or local laws or regulations may
hinder the Company's ability to market its products in those states or
localities.
Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company. There can be no assurance that the
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Company will not be required to incur significant costs to comply with laws and
regulations in the future or that laws or regulations will not have a material
adverse effect upon the Company. See "Risk Factors -- Government Regulation."
THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase diagnostic products, including the Company's L-D-X
System, generally rely on third party payors, principally private health
insurance plans, federal Medicare and state Medicaid, to reimburse all or part
of the cost of the procedure in which the product is being used. The Company's
ability to commercialize its products successfully in the United States will
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities (such as HCFA, which determines Medicare
reimbursement levels), private health insurers and other organizations. Such
third party payors can affect the pricing or the relative attractiveness of the
Company's products by regulating the maximum amount of reimbursement provided by
such payors for testing services. Reimbursement is currently not available for
certain uses of the Company's products. For example, the cost of the L-D-X
Analyzer is generally not subject to reimbursement by government or other third
party payors. In addition, the tests performed by public health departments,
corporate wellness programs and other large volume users in the screening market
are generally not subject to reimbursement. In addition, certain health care
providers are moving towards a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per patient.
Managed care providers are attempting to control the cost of health care by
authorizing fewer elective procedures, such as screening of blood disease
levels. The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third party payors. The Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used. Third
party payors are increasingly scrutinizing and challenging the prices charged
for medical products and services. Decreases in reimbursement amounts for tests
performed using the Company's products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
the Company's ability to sell its products on a profitable basis. Failure by
physicians and other users to obtain reimbursement from third party payors, or
changes in government and private third party payors' policies toward
reimbursement of tests employing the Company's products could have a material
adverse effect on the Company's business. Given the efforts to control and
reduce health care costs in the United States in recent years, there can be no
assurance that currently available levels of reimbursement will continue to be
available, or that adequate reimbursement will be available in the future for
the Company's existing products or products under development. See "Risk Factors
- -- Uncertainty Relating to Third Party Reimbursement."
Effective October 1, 1991, HCFA adopted new regulations providing for the
inclusion of capital-related costs in the prospective payment system, under
which providers are reimbursed on a
per-diagnosis basis at fixed rates unrelated to actual costs, based on DRGs.
Under this system of reimbursement, equipment costs generally will not be
reimbursed separately, but rather, will be included in a single, fixed-rate, per
patient reimbursement. These regulations are being phased in over a ten-year
period, and, although the full implications of these regulations cannot yet be
known, the Company believes that the new regulations will place more pressure on
hospitals' operating margins, causing them to limit capital expenditures. These
regulations could have an adverse effect on the Company if hospitals decide to
defer obtaining medical equipment as a result of any such limitation on their
capital expenditures. The Company is unable to predict what adverse impact on
the Company, if any, additional government regulations, legislation or
initiatives or changes by other payors affecting reimbursement or other matters
that may influence decisions to obtain medical equipment may have.
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In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance.
The Company believes that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance as to either United States or foreign markets that third party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis.
PRODUCT LIABILITY AND INSURANCE
Sale of the Company's products entails risk of product liability claims. The
medical testing industry has historically been litigious, and the Company faces
financial exposure to product liability claims in the event that use of its
products result in personal injury. The Company also faces the possibility that
defects in the design or manufacture of its products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $5.0 million per
occurrence and $5.0 million annually in the aggregate, and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. No assurance can be
given that product liability insurance can be maintained in the future at a
reasonable cost or in sufficient amounts to protect the Company against losses
due to liability. An inability to maintain insurance at an acceptable cost or to
otherwise protect against potential product liability could prevent or inhibit
the continued commercialization of the Company's products. In addition, a
product liability claim in excess of relevant insurance coverage or product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has liability insurance covering its property and operations
with coverage and deductible amounts and exclusions which the Company believes
are customary for companies of its size in its industry. The Company's personal
property is insured for up to $4.0 million and it has comprehensive general
liability coverage of up to $5.0 million. In addition, the Company has business
interruption insurance of up to $5.6 million. There can be no assurance that the
Company's current insurance coverage is adequate or that it will be able to
maintain insurance at an acceptable cost or otherwise to protect against
liability.
EMPLOYEES
As of March 31, 1996, the Company employed 79 full-time employees. There
were 33 employees in sales, marketing and administration and 42 employees in
manufacturing and 4 employees devoted to research and development. The Company
seeks to attract and retain skilled and experienced employees with directly
relevant experience in the fields of interest, although there can be no
assurance that it will continue to do so in the future. The loss of key
personnel or the inability to hire or retain qualified personnel, in particular
a new executive officer of sales could have a material adverse effect on the
Company's business, financial condition and results of operations. None of the
employees is covered by a collective bargaining agreement, and management
considers relations with employees to be excellent.
42
<PAGE>
FACILITIES
The Company leases a 30,000 square foot facility in Hayward, California. The
Company's facility contains approximately 5,000 square feet of laboratory space,
7,000 square feet of manufacturing space and approximately 18,000 square feet
devoted to marketing and administrative and common areas. The Company's lease on
the facility expires in the year 2000. The Company believes that this facility
is adequate to meet its requirements through the expiration of its lease.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of May 7, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Warren E. Pinckert II........................ 52 President, Chief Executive Officer and Director
Steven L. Barbato............................ 46 Vice President of Manufacturing
Gary E. Hewett............................... 44 Vice President of Diagnostic Development
Richard H. Janney............................ 37 Vice President of Finance and Chief Financial Officer
Harvey S. Sadow, Ph.D. (1)(2)................ 73 Chairman of the Board of Directors
Joseph Buchman, M.D. (1)..................... 66 Director
John L. Castello (2)......................... 60 Director
H.R. Shepard (1)............................. 75 Director
</TABLE>
- --------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
WARREN E. PINCKERT II joined the Company as Chief Financial Officer and Vice
President of Business Development in 1989 and became Secretary in February 1990.
Mr. Pinckert became Executive Vice President of Operations in May 1991 while
retaining his previous positions. In June 1993, Mr. Pinckert became President
and Chief Executive Officer and was appointed to the Board of Directors. Prior
to joining Cholestech, he was Chief Financial Officer for Sunrise Medical Inc.,
an international durable medical equipment manufacturer, from 1983 to 1989. Mr.
Pinckert also serves on the Board of Directors of PacifiCare Health Systems, a
managed care organization. Mr. Pinckert earned a B.S. in Accounting and an
M.B.A. from the University of Southern California and is a certified public
accountant.
STEVEN L. BARBATO joined the Company as Vice President of Manufacturing in
May 1992. From 1990 to January 1992, Mr. Barbato served as Vice President of
Operations of the Pandex Division of Baxter Diagnostics, Inc. ("Baxter
Diagnostics"), a biotechnical instrument and reagent development division and
served in other capacities at Baxter Diagnostics from January 1992 to May 1992.
From 1989 to 1990, Mr. Barbato served as Director of Manufacturing for the
Paramax Chemistry Division of Baxter Diagnostics, a division manufacturing
automated whole blood analyzers. From 1987 to 1989, Mr. Barbato was employed as
Manager of Manufacturing by the Pandex Division of Baxter Diagnostics. Mr.
Barbato earned a B.S. in Chemical Engineering from Northeastern University and
an M.B.A. from Xavier University.
GARY E. HEWETT, a co-founder of the Company, has served as Vice President of
Diagnostic Development since the Company's inception in 1988. From 1985 to 1988,
Mr. Hewett was employed by Genelabs, Inc., a biotechnology company, as Vice
President of Diagnostics. Prior to 1985, he was employed in a variety of
management and technical positions at the following companies: Cetus
Corporation, a biotechnology firm, from 1983 to 1985; Molecular Design, Inc., a
computer software company, from 1980 to 1983; Beckman Instruments, Inc., a
clinical instrument company, from 1978 to 1983; and Durrum Instrument (Dionics),
an analytical instrument firm, from 1975 to 1978. Mr. Hewett earned a B.A. in
Neurophysiology from the University of California, Berkeley.
RICHARD H. JANNEY joined the Company in September 1992 as Controller and
became Vice President of Finance and Chief Financial Officer in March 1995.
Prior to joining the Company, he was employed by Price Waterhouse LLP from 1984
to September 1992. Mr. Janney earned a B.S. in Business Administration from
California Polytechnic State University at San Luis Obispo and is a certified
public accountant.
HARVEY S. SADOW, PH.D. has been a Director of the Company since January 1990
and has served as Chairman of the Board of Directors of the Company since
February 1992. He was President and Chief
44
<PAGE>
Executive Officer of Boehringer Ingelheim Corporation, a health care company,
from 1971 to 1988, and of Boehringer Ingelheim Pharmaceuticals, Inc., an ethical
specialty pharmaceutical company, from 1984 to 1988. In 1988 upon his
retirement, he became Chairman of the Board of Directors of both Boehringer
Ingelheim Corporation and Boehringer Ingelheim Pharmaceuticals, Inc. Dr. Sadow
retired as Chairman of both companies in December 1990 and remained on the Board
of Directors of both companies until December 1992. From 1967 to 1971, Dr. Sadow
was Senior Vice President, Scientific Affairs, of the U.S.V. Pharmaceutical
Corporation, Revlon Health Care Division. He also serves as Chairman of the
Board of Directors of Cortex Pharmaceuticals, Inc., a neuroscience company; as a
director of Anika Research Corporation, a research company; as a director of
Cytel Corporation, a pharmaceutical company; a director of Houghten
Pharmaceutical Inc., a pharmaceutical company; and as a director of Penederm,
Inc., a dermatologic product company. Dr. Sadow earned a B.S. from the Virginia
Military Institute, an M.S. from the University of Kansas and a Ph.D. from the
University of Connecticut.
JOSEPH BUCHMAN, M.D. has been a Director of the Company since July 1994. He
is a practicing physician with a private practice in Ridgefield and Danbury,
Connecticut. He is a certified member of the American Board of Internal Medicine
and Cardiovascular Disease. Dr. Buchman is currently director of the Preventive
Cardiology Program for Danbury Hospital Health Services, and has been a member
of the Cardiothoracic and Vascular Group, a professional corporation in
Ridgefield, Connecticut since 1992. Prior to 1992, Dr. Buchman maintained a
private medical practice. Dr. Buchman has published numerous articles on the
subject of coronary risk factors. Dr. Buchman earned a B.A. from Wesleyan
University and a M.D. from New York University, College of Medicine.
JOHN L. CASTELLO has been a Director of the Company since August 1993. He is
the Chairman of the Board, President and Chief Executive Officer of Xoma
Corporation ("Xoma"), a biotechnology company. He joined Xoma in April 1992
after serving as President and Chief Operating Officer of the Ares Serono Group,
a Swiss ethical pharmaceutical company, from 1988 to August 1991, and prior to
that he was President of the Serano Diagnostics Division from 1986 to 1988. From
1977 to 1986, Mr. Castello held senior management positions at Amersham
International PLC and Abbott Laboratories. Mr. Castello also serves on the Board
of Directors of Metra Biosystems, Inc. Mr. Castello earned a B.S. in Mechanical
and Industrial Engineering from Notre Dame University.
H. R. SHEPHERD has been a director of the Company since July 1994. He is a
special advisor to the Chairman of the Board of Directors of Medeva PLC, an
international pharmaceuticals company, and is a founder and Chairman of the
Board of the Albert B. Sabin Vaccine Foundation. Mr. Shepherd served as Chairman
and Chief Executive Officer of Armstrong Pharmaceuticals, a company specializing
in aerosol pharmaceutical packaging and labeling, from 1985 to August 1993,
before it was acquired by Medeva PLC. Mr. Shepherd earned a B.S. from Cornell
University and a Honorary Doctorate of Humane Letter from Villanova University.
All directors are elected at each annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors. There are no family relationships among the Company's
directors and executive officers.
DIRECTORS' COMPENSATION
Nonemployee directors who do not represent shareholders holding more than
one percent of the outstanding shares ("Outside Directors") receive a $1,000 fee
for each meeting of the Board of Directors attended. Outside Directors also
receive a $500 fee for each meeting of the Audit or Compensation Committee
attended that is not in conjunction with a regular board meeting. In addition,
the 1988 Stock Incentive Program provides that options to purchase the Company's
Common Stock may be granted to
45
<PAGE>
Outside Directors pursuant to a nondiscretionary, automatic grant mechanism,
whereby each such director is granted an option to purchase 10,000 shares on the
date of each annual meeting of shareholders. Pursuant to the provisions of the
1988 Stock Incentive Program, in August 1995 Dr. Buchman, Mr. Castello, Dr.
Sadow and Mr. Shepherd were each granted nonstatutory options to purchase 10,000
shares of the Company's Common Stock at an exercise price of $2.25 per share.
See "-- 1988 Stock Incentive Program."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Sadow and
Castello. There are no interlocking relationships, as described by the
Securities and Exchange Commission, between the Compensation Committee members.
See "-- 1988 Stock Incentive Program" and "-- Employee Stock Purchase Plan."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended March 31, 1996,
1995 and 1994, compensation awarded to, paid to or earned by, (i) the Company's
Chief Executive Officer and (ii) the Company's next four most highly compensated
executive officers whose salary and bonus exceeded $100,000 during the fiscal
year ended March 31, 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS(#) COMPENSATION(2)($)
- --------------------------------------- --------- ---------- --------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II(3) .............. 1996 $ 145,440 $ -- $ -- 10,000 $ 6,050
President and Chief 1995 153,333 -- -- 249,958(5) 6,143
Executive Officer 1994 155,833 10,000 -- 209,958 6,193
Gary E. Hewett ........................ 1996 131,191 -- 39,336 -- 1,863
Vice President of Diagnostic 1995 130,000 10,000 4,278 70,000(5) 4,255
Development 1994 130,000 -- 11,605 -- 4,055
Linda H. Masterson(4) ................. 1996 131,000 -- 19,967 5,000 2,289
Executive Vice President of Marketing 1995 114,750 -- 17,922 90,000 2,063
and Sales 1994 -- -- -- -- --
Steven L. Barbato ..................... 1996 106,050 -- -- 3,000 5,914
Vice President of 1995 104,167 10,000 25,350 45,000(6) 5,971
Manufacturing 1994 95,000 6,891 36,075 10,000 6,048
</TABLE>
- --------------
(1) The amounts described hereunder were paid by the Company as follows: In
fiscal 1996, to Mr. Hewett, $35,640 for forgiveness of a loan and $3,696 for
the compensation paid in connection with the Company's Research and
Development Incentive Program; and to Ms. Masterson, $14,545 for relocation
expenses and $5,422 for income taxes paid on nonreimbursed relocation
expense. In fiscal 1995, to Mr. Hewett $2,851 and $917 for forgiveness of a
loan and income taxes paid on the forgiveness of the loan, respectively, and
$510 for the compensation paid in connection with the Company's Research and
Development Incentive Program; to Ms. Masterson $17,922 for relocation
46
<PAGE>
expenses; and to Mr. Barbato $25,350 for the forgiveness of a relocation
loan. In fiscal 1994, to Mr. Hewett $8,554 and $3,051 for forgiveness of a
loan and income taxes paid on the forgiveness of the loan, respectively; and
to Mr. Barbato $36,078 for the forgiveness of a relocation loan.
(2) The amounts described hereunder were paid by the Company for premiums on
group term life insurance and medical and dental insurance.
(3) In October 1994, Mr. Pinckert voluntarily reduced his compensation by 10%.
(4) Ms. Masterson joined the Company in May 1994 and resigned as Executive Vice
President of Marketing and Sales in April 1996.
(5) Represents options granted pursuant to an option exchange program approved
by the Board of Directors in August 1994. See description under "-- 1988
Stock Incentive Program."
(6) Includes 35,000 shares subject to options granted pursuant to an option
exchange program approved by the Board of Directors in August 1994. See
description under "-- 1988 Stock Incentive Program."
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended March 31,
1996. All such options were awarded under the Company's 1988 Stock Incentive
Program.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(5)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR(1) SHARE(2)(3) DATE(4) 5%($) 10%($)
- ---------------------------------------- ----------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II................... 10,000 4.7% $ 2.25 10/30/00 $ 6,216 $ 13,736
Linda H. Masterson(6)................... 5,000 2.3 2.25 10/30/00 563 1,125
Steven L. Barbato....................... 3,000 1.4 2.25 10/30/00 1,865 4,121
Gary E. Hewett(7)....................... -- -- -- -- -- --
</TABLE>
- --------------
(1) Based on an aggregate of 212,923 options granted under the 1988 Stock
Incentive Program.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(3) Exercise price may be paid in cash, check, promissory note, by delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, or pursuant to a cashless exercise procedure under which the
optionee provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
(4) The stock options granted in the fiscal year ended March 31, 1996 are
exercisable starting three months after the date of grant, with 6.25% of the
shares covered thereby becoming exercisable at that time and with an
additional 6.25% of the option shares becoming exercisable at the end of
each three month period thereafter, with full vesting occurring on the
fourth anniversary of the date of grant. Under the 1988 Stock Incentive
Program, the Board retains the discretion to modify the terms, including the
price, of outstanding options.
(5) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the
47
<PAGE>
expiration of the five year option term. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price growth.
(6) Ms. Masterson resigned as Executive Vice President of Marketing and Sales in
April 1996.
(7) Mr. Hewett is eligible to receive cash bonuses under the Company's Research
and Development Incentive Program.
The following table sets forth certain information regarding the exercise of
stock options by the Named Executive Officers during the fiscal year ended March
31, 1996 and stock options held as of March 31, 1996 by the Named Executive
Officers.
OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS(#) ($)(2)
ON EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II.......... 1,470 $ 2,279 179,972 98,111 $ 562,847 $ 312,232
Linda H. Masterson(3).......... -- -- 35,937 59,063 128,199 222,285
Steven L. Barbato.............. -- -- 29,562 18,438 93,125 65,148
Gary E. Hewett................. 20,827 125,678 77,499 17,501 249,879 53,605
</TABLE>
- --------------
(1) Market value of underlying securities at date of exercise less the exercise
price, but does not necessarily indicate that the optionee sold the
underlying stock.
(2) Fair market value of the Common Stock as of March 31, 1996 minus the
exercise price.
(3) Ms. Masterson resigned as Executive Vice President of Marketing and Sales in
April 1996.
1988 STOCK INCENTIVE PROGRAM
The Company's 1988 Stock Incentive Program (the "Option Program") was
adopted in 1988. The Option Program provides for the granting to employees
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
the granting of nonstatutory stock options to employees (including officers),
directors and consultants. The purpose of the Option Program is to attract and
retain the best available personnel to the Company and to give them a greater
personal stake in the success of the Company. A total of 1,550,000 shares of
Common Stock has been reserved for issuance under the Program.
The Option Program is currently administered by the Compensation Committee
of the Board of Directors, which determines the terms of the options granted
under the Option Program, including the exercise price, number of shares subject
to the option and the exercisability thereof. Generally, options granted to
employees and consultants under the Option Program vest and become exercisable
at a rate of 6.25% of the shares subject to the option per quarter but may not
be exercised prior to one year from the commencement of employment or the
consultant relationship. The terms of all incentive stock options and
nonstatutory stock options granted under the Option Program may not exceed ten
years and one day, although the Company generally grants options with five year
terms. However, the terms of all incentive stock options and nonstatutory stock
options granted to an optionee who, at the time of grant, owns stock
representing more than 10% of the voting rights of the Company's outstanding
capital stock, may not exceed five years. No option granted under the Option
Program may be transferred by the optionee other than by will or the laws of
descent or distribution and each option may be exercised, during the lifetime of
the optionee, only by such optionee. In the event of a merger of the Company
with or into another corporation or a sale of substantially all of the Company's
assets, each option will be assumed or an equivalent option substituted by the
successor corporation unless the Compensation
48
<PAGE>
Committee accelerates the exercisability of all outstanding options. Options
granted to executive officers and directors provide that all unvested options
are accelerated to vest fully upon the sale, merger or liquidation of the
Company.
The exercise price of all incentive stock options granted under the Option
Program must be at least equal to the fair market value of the shares on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date. No incentive stock options may be
granted to a participant, which, when aggregated with all other incentive stock
options granted to such participant, would have an aggregate fair market value
in excess of $100,000 becoming exercisable in any calendar year. The exercise
price of all nonstatutory stock options granted under the Option Program must be
at least 85% of the fair market value of the Common Stock on the date of grant.
No options have been granted to date at prices less than 100% of the fair market
value on the date of grant.
The Option Program provides that options may not be granted to Outside
Directors who represent significant shareholders. The Option Program provides
that options may be granted to Outside Directors only pursuant to a
nondiscretionary, automatic grant mechanism, whereby each Outside Director is
automatically granted an option to purchase 10,000 shares on the date of each
annual meeting of shareholders. Each new Outside Director that becomes an
Outside Director within six months after an annual meeting of shareholders will
automatically be granted an option to purchase 10,000 shares upon the date on
which such person first becomes an Outside Director. Options granted to Outside
Directors have an exercise price equal to the fair market value of a share of
Common Stock on the date of grant and vest at a rate of 25% per calendar quarter
following the date of grant so long as the optionee remains a director of the
Company.
In August 1994, the Compensation Committee of the Board of Directors
implemented a Stock Option Exchange Program (the "Exchange Program") for all
current employees and consultants, including the executive officers. Under the
Exchange Program all current employees and consultants owning stock options with
an exercise price greater than $3.50 per share were given the opportunity to
exchange their stock options for new options having an exercise price of $3.50
per share. At the time of the Committee action approving the Exchange Program,
the market value of the Company's common stock was $2.50 per share. In exchange
for the opportunity to exchange stock options, each employee or consultant
forfeited approximately 25% of his or her then-current vesting credit. The
Compensation Committee took this action to maintain morale across the Company,
to help maintain momentum in the development projects and to retain key
contributors in all areas of the Company, including the executive officers.
As of March 31, 1996, 490,905 shares of Common Stock had been issued
pursuant to stock purchase rights or upon exercise of options granted under the
Option Program, options to purchase 875,683 shares of Common Stock at a weighted
average exercise price of $3.29 per share were outstanding and 183,412 shares
remained available for future option grants under the Program.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and approved by the Company's shareholders in April
1992. The Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended. A total of 200,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan. The Purchase Plan has
offering periods of approximately six months, commencing on or after each
January 1 and July 1. The Purchase Plan is administered by the Compensation
Committee of the Board of Directors. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 15% of an employee's compensation. No employee may purchase more than
$25,000 worth of Common Stock in any calendar year. Employees are eligible to
participate if they are employed by the
49
<PAGE>
Company or a subsidiary of the Company designated by the Board of Directors for
at least 20 hours per week and have been so employed for more than five months
in a calendar year. The price of stock purchased under the Purchase Plan is 85%
of the lower of (i) the fair market value of the Common Stock at the beginning
of the offering period or (ii) the fair market value of the Common Stock at the
end of the offering period. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company.
401(K) PLAN
Effective in September 1990, the Company adopted the Cholestech Corporation
Retirement Savings Plan (the "401(k) Plan") that covers all eligible employees
of the Company. During calendar 1995, an eligible employee could elect to defer,
in the form of contributions to the 401(k) Plan, between 1% and 15% of the total
compensation that would otherwise be paid to the employee, not to exceed $9,240
per year (adjusted for cost-of-living increases). During calendar 1996, the
maximum deferral election has increased to $9,500. Employees' contributions are
invested in selected equity mutual funds, a guaranteed interest contract account
or a money market fund according to the directions of the employees. The
contributions are fully vested and nonforfeitable at all times. The 401(k) Plan
provides for employer contributions as determined by the Board of Directors.
Through March 31, 1996, the Company had not made any contributions to the 401(k)
Plan.
EMPLOYMENT AGREEMENTS
Pursuant to an employment agreement with the Company entered into in June
1993, Mr. Pinckert was entitled to receive an initial annual base salary of
$160,000 for fiscal 1996 versus the $145,440 he actually received. In October
1994 Mr. Pinckert voluntarily reduced his base salary by 10% to $144,000 in
order to lower the operating costs of the Company. The Board of Directors has
approved a twelve-month wage and benefits continuation package for Mr. Pinckert
in the event he is terminated from the Company.
The Board of Directors has approved a six-month wage and benefits
continuation package for Mr. Barbato and Mr. Janney in the event of the
involuntary termination of their employment with the Company. In addition, the
Board of Directors has approved a three-month wage and benefits continuation
package for Mr. Hewett in the event of the involuntary termination of his
employment with the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Restated Articles of Incorporation
that eliminate to the fullest extent permissible under California law the
liability of its directors to the Company for monetary damages. Such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1988, the Company granted a loan to Mr. Hewett in connection with
his purchase of 35,640 shares of the Company's Common Stock pursuant to a stock
purchase agreement. The loan was evidenced by a promissory note in the amount of
$35,640 due in April 1993, which bore interest at the annual rate of 8%. The
loan was secured in November 1989 by independent collateral. In September 1991,
the Board of Directors approved the forgiveness of the loan in the event of the
involuntary termination of Mr. Hewett's employment with the Company. In June
1993, the Board of Directors approved an amendment to the loan agreement
providing for forgiveness of the principal loan balance in April 1995 as long as
Mr. Hewett remained employed by the Company until such time. The remaining
balance of the loan, $35,640, was forgiven in April 1995.
In April 1992, the Company entered into an employment agreement with Mr.
Barbato providing for certain relocation benefits, including the cost of
alternative housing for up to six months until his prior residence was sold,
reimbursement of moving expenses and closing costs upon the sale of his prior
residence, and a bridge loan to assist the purchase of a new residence in the
event such purchase occurred before the sale of his prior residence. In July
1992, Mr. Barbato executed a promissory note evidencing a $100,000 bridge loan.
This interest free promissory note was repaid in full in October 1992. In July
1992, Mr. Barbato borrowed $65,000 from the Company pursuant to a promissory
note. This promissory note bears interest at a rate of 8.0% per annum and was
due September 1994. This promissory note provided for quarterly forgiveness of
$8,125 of the outstanding balance and any accrued interest as additional
compensation as long as Mr. Barbato remained employed with the Company. The loan
was forgiven in full as of March 31, 1995.
All future transactions, including loans, between the Company and its
officers, directors, principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
51
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1996 and as adjusted to
reflect the sale of the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters over-allotment option): (i) by each
Director, (ii) by each of the Named Executive Officers, and (iii) by all
Directors and executive officers as a group. The Company does not know of any
person that is the beneficial owner of more than 5% of the outstanding shares of
Common Stock. Except as otherwise noted, the shareholders named in the table
have sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to applicable community property
laws.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(2)
SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Warren E. Pinckert II (3)...................................................... 277,838 3.4% 2.5%
Harvey S. Sadow, Ph.D. (4)..................................................... 55,723 * *
John L. Castello (5)........................................................... 27,500 * *
Joseph Buchman (6)............................................................. 17,500 * *
H.R. Shepherd (7).............................................................. 17,500 * *
Gary E. Hewett (8)............................................................. 136,880 1.7 1.2
Linda H. Masterson (9)......................................................... 49,602 * *
Steve L. Barbato (10).......................................................... 32,562 * *
626,135 7.6 5.4
All current Directors and executive officers as a group (9 persons) (11).......
</TABLE>
- --------------
Less*than one percent.
(1)
The addresses of the persons set forth above is the address of the Company
appearing elsewhere in this Prospectus.
(2)
This table is based upon information supplied by officers, directors and
principal shareholders. Applicable percentage of ownership is based on
8,131,824 shares of Common Stock outstanding as of March 31, 1996 together
with applicable options for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to
shares. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days after March 31, 1996 are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants, but are not deemed outstanding for computing the
percentage of any other person.
(3)
Includes 196,221 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(4)
Includes 48,595 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(5)
Represents 27,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(6)
Represents 17,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(7)
Represents 17,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(8)
Includes 81,874 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(9)
Includes 41,875 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(10)
Represents 32,562 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(11)
Includes 474,376 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Articles of Incorporation provide that the authorized
capital stock of the Company is 25,000,000 shares of Common Stock, no par value,
and 5,000,000 shares of undesignated Preferred Stock, no par value. As of March
31, 1996, 8,131,824 shares of Common Stock and no shares of Preferred Stock were
outstanding. As of May 7, 1996, there were 308 holders of record of the
Company's Common Stock.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company hereby will be upon payment therefor,
validly issued, fully paid and nonassessable. Subject to the prior rights of the
holders of any Preferred Stock, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available therefor
at such times and in such amounts as the Board of Directors may from time to
time determine. The shares of Common Stock are neither redeemable nor
convertible and the holders thereof have no preemptive or subscription rights to
purchase any securities of the Company. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive pro rata
the assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
any holders of Preferred Stock then outstanding. Each outstanding share of
Common Stock is entitled to one vote on all matters submitted to a vote of
stockholders and have cumulative voting rights with respect to the election of
directors.
WARRANTS
As of March 31, 1996, there were outstanding warrants to purchase an
aggregate of 39,242 shares of Common Stock at an exercise price of $3.50 per
share. Such warrants expire on July 15, 1999.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
shareholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the shareholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. The Company has no current plans to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Metra Biosystems holds 39,526 shares of Common Stock, and has the right to
purchase $750,000 of additional shares of Common Stock on achievement of certain
milestones by the Company, where the aggregate number of shares to be purchased
is determined by calculating a weighted average based on the five day trading
average before the completion of the milestone (collectively the "Registrable
Securities"). Metra Biosystems or its transferees is entitled to certain rights
with respect to the registration of such shares under the Securities Act.
Beginning May 6, 1997, if the Company proposes to register or Metra Biosystems
requests the registration of any of its securities under the Securities Act,
either for its own account or the account of other securityholders, Metra
Biosystems is entitled to notice of such
53
<PAGE>
registration and is entitled to include Registrable Securities therein,
provided, among other conditions, that between May 6, 1997 and May 6, 1998, the
Company shall only be required to include in such registration one-half of the
Registrable Securities. In addition, Metra Biosystems may require the Company,
beginning May 6, 1997, on not more than two occasions in any 12 month period to
file a registration statement on Form S-3 under the Securities Act, at the
Company's expense, with respect to all of the Registrable Securities, the
Company is required to use its best efforts to affect such registration, subject
to certain conditions and limitations. Further, in the event Metra Biosystems
requests a registration on Form S-3 and the Company is not then entitled to use
Form S-3, then Metra Biosystems may require the Company to file a registration
statement on Form S-1 at the Company's expense, with respect to all of the
Registrable Securities. The Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations. The
registration rights of Metra Biosystems terminate upon the earlier to occur of
May 6, 2001 or at such time as Metra Biosystems is able to dispose of all of the
Registrable Securities in one three-month period pursuant to provisions of Rule
144.
TRANSFER AGENT
The transfer agent for the Common Stock is Wells Fargo Bank, N.T.&N.A.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. and Principal Financial Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective number
of shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Vector Securities International, Inc.................................................
Principal Financial Securities, Inc..................................................
--------
Total.............................................................................. 3,000,000
--------
--------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares of Common Stock, the Offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 450,000 shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over allotments, if any, in connection with the Offering. To the extent
such option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
listed in the table.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain other stockholders of the
Company have agreed that they will not, without the prior written consent of
Vector Securities International, Inc., offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 90 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock for a period of 90
days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plans, or issue shares upon the
exercise of outstanding stock options or warrants.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market-
55
<PAGE>
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934 during the
two business day period before commencement of sales in the Offering. The
passive market making transactions must comply with applicable volume and price
limits and be identified as such. In general, a passive market maker may display
its bid at a price not in excess of the highest independent bid for the
security. If all independent bids are lowered below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Net purchases by a passive market maker on each day are generally
limited to a specified percentage of the passive market making average daily
trading volume in the Common Stock during a price period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail, and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
EXPERTS
The balance sheets as of March 31, 1995 and 1996 and the statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended March 31, 1996 and the financial statement schedule included in
this Prospectus and elsewhere in the Registration Statement, have been so
included in this Prospectus and in the Registration Statement in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The statements in this Prospectus under the captions "Risk Factors --
Uncertainty of Patent and Propriertary Technology Protection; License of
Technology of Third Parties" and "Business -- Patents and Proprietary
Technology" have been reviewed and approved by Dehlinger & Associates, patent
counsel for the Company, as experts on such matters, and are included herein in
reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's following Regional Offices: Suite 1400,
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and
13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933 with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. Copies of the Registration Statement, including
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Changes in Shareholders' Equity............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Cholestech Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Cholestech Corporation at
March 31, 1995 and March 29, 1996, and the results of its operations and its
cash flows for each of the three years in the period ended March 29, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
April 24, 1996, except as to Note 11,
which is as of May 9, 1996
F-2
<PAGE>
CHOLESTECH CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 1,230,000 $ 361,000
Marketable securities........................................................... 4,000,000 --
Restricted marketable securities................................................ -- 3,750,000
Accounts receivable............................................................. 664,000 1,107,000
Inventories..................................................................... 1,351,000 1,910,000
Prepaid expenses and other assets............................................... 168,000 167,000
-------------- --------------
Total current assets.......................................................... 7,413,000 7,295,000
Property and equipment, net....................................................... 2,182,000 2,041,000
Other assets, net................................................................. 446,000 309,000
-------------- --------------
$ 10,041,000 $ 9,645,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings...................................................... $ -- $ 250,000
Accounts payable and accrued expenses........................................... 893,000 1,614,000
Accrued payroll and benefits.................................................... 304,000 253,000
Product warranty................................................................ 150,000 187,000
Current portion of long-term debt............................................... -- 499,000
Other liabilities............................................................... 137,000 50,000
-------------- --------------
Total current liabilities..................................................... 1,484,000 2,853,000
Long-term debt, less current portion.............................................. -- 799,000
Other liabilities................................................................. 44,000 11,000
-------------- --------------
Total liabilities............................................................. 1,528,000 3,663,000
-------------- --------------
Commitments (Notes 5 and 6).......................................................
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding............................................... -- --
Common Stock, no par value; 25,000,000 shares authorized;
7,999,962 and 8,131,824 shares issued and outstanding.......................... 55,465,000 55,644,000
Note receivable from issuance of Common Stock................................... (36,000) --
Accumulated deficit............................................................. (46,916,000) (49,662,000)
-------------- --------------
Total shareholders' equity.................................................... 8,513,000 5,982,000
-------------- --------------
$ 10,041,000 $ 9,645,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CHOLESTECH CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 25, MARCH 31, MARCH 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Domestic............................................................ $ 1,844,000 $ 3,221,000 $ 5,548,000
International....................................................... 1,185,000 817,000 1,325,000
------------ ------------ ------------
3,029,000 4,038,000 6,873,000
Cost of products sold................................................. 4,972,000 3,933,000 4,505,000
------------ ------------ ------------
Gross profit (loss)................................................... (1,943,000) 105,000 2,368,000
------------ ------------ ------------
Operating expenses:
Research and development............................................ 2,134,000 715,000 714,000
Sales and marketing................................................. 2,909,000 2,694,000 3,168,000
General and administrative.......................................... 2,288,000 1,983,000 1,376,000
------------ ------------ ------------
Total operating expenses.......................................... 7,331,000 5,392,000 5,258,000
------------ ------------ ------------
Loss from operations.................................................. (9,274,000) (5,287,000) (2,890,000)
Interest income....................................................... 447,000 278,000 284,000
Interest expense...................................................... (83,000) (35,000) (140,000)
------------ ------------ ------------
Net loss.............................................................. $ (8,910,000) $ (5,044,000) $ (2,746,000)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share.................................................... $ (1.14) $ (.63) $ (.34)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares........................................ 7,790,684 7,954,284 8,041,531
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CHOLESTECH CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- --------------------- NOTE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT TOTAL
--------- ----------- --------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 26, 1993..... -- $ -- 7,648,471 $54,991,000 $ (36,000) ($32,962,000) $21,993,000
Issuance of Common Stock...... 262,141 226,000 226,000
Compensation expense relating
to stock options............. 104,000 104,000
Net loss...................... (8,910,000) (8,910,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 25, 1994..... -- -- 7,910,612 55,321,000 (36,000) (41,872,000) 13,413,000
Issuance of Common Stock...... 89,350 72,000 72,000
Compensation expense relating
to stock options............. 72,000 72,000
Net loss...................... (5,044,000) (5,044,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 31, 1995..... -- -- 7,999,962 55,465,000 (36,000) (46,916,000) 8,513,000
Issuance of Common Stock...... 131,862 140,000 140,000
Compensation expense relating
to stock options............. 39,000 39,000
Foregiveness of loan.......... 36,000 36,000
Net loss...................... (2,746,000) (2,746,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 29, 1996..... -- $ -- 8,131,824 $55,644,000 $ -- ($49,662,000) $5,982,000
--------- ----------- --------- ---------- ----------- ------------ ----------
--------- ----------- --------- ---------- ----------- ------------ ----------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
CHOLESTECH CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 25, MARCH 31, MARCH 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (8,910,000) $ (5,044,000) $ (2,746,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 1,098,000 729,000 612,000
Deferred revenue.................................................. (215,000) (74,000) (30,000)
Compensation expense relating to stock options issued below
market........................................................... 104,000 72,000 39,000
Forgiveness of note receivable.................................... -- -- 36,000
Write-off of property and equipment............................... 231,000 2,000 3,000
Changes in assets and liabilities:
Accounts receivable............................................. 357,000 (283,000) (443,000)
Inventories..................................................... (31,000) 103,000 (559,000)
Prepaid expenses and other assets............................... 331,000 2,000 1,000
Other assets.................................................... 153,000 (8,000) (6,000)
Accounts payable and accrued expenses........................... (218,000) (115,000) 721,000
Accrued license fee............................................. (290,000) -- --
Accrued payroll and benefits.................................... 429,000 (391,000) (51,000)
Product warranty................................................ (110,000) -- 37,000
Other liabilities............................................... (100,000) -- --
------------ ------------ ------------
Net cash used in operating activities............................. (7,171,000) (5,007,000) (2,386,000)
------------ ------------ ------------
Cash flows from investing activities:
Sales (proceeds) of marketable securities, net...................... 436,000 5,630,000 250,000
Purchases of property and equipment................................. (657,000) (625,000) (331,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities............... (221,000) 5,005,000 (81,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt........................................ -- -- 1,500,000
Principal payments on long-term debt................................ -- -- (202,000)
Proceeds from short-term bank borrowing............................. -- -- 250,000
Principal payments on capital leases................................ (685,000) (268,000) (90,000)
Restricted cash investment.......................................... 380,000 -- --
Issuance of Common Stock............................................ 226,000 72,000 140,000
------------ ------------ ------------
Net cash (used in) provided by financing activities............... (79,000) (196,000) 1,598,000
------------ ------------ ------------
Net change in cash and cash equivalents............................... (7,471,000) (198,000) 869,000
Cash and cash equivalents at beginning of period...................... 8,899,000 1,428,000 1,230,000
------------ ------------ ------------
Cash and cash equivalents at end of period............................ $ 1,428,000 $ 1,230,000 $ 361,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............................. $ 83,000 $ 35,000 $ 140,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of non-cash financing and investing
activities:
Capital lease obligations incurred for acquisition of property and
equipment.......................................................... $ 53,000 $ 105,000 $ --
------------ ------------ ------------
------------ ------------ ------------
Reclassification of $3,750,000 in marketable securities to
restricted marketable securities in connection with a line of
credit.
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Cholestech Corporation (the "Company") was incorporated February 2, 1988 to
develop, manufacture and sell point-of-care systems which can perform various
diagnostic tests using a single drop of whole blood.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The Company's fiscal year is a 52-53 week period ending on the last Friday
in March. Fiscal 1994, 1995 and 1996 comprised 52, 53 and 52 week periods,
respectively.
REVENUE RECOGNITION
All revenues from product sales are recognized at the time products are
shipped and are denominated in U.S. dollars. The Company also provides an amount
for estimated sales returns.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents; investments with
maturities between three and twelve months are classified as short-term
marketable securities and investments with maturities which exceed twelve months
are classified as long-term marketable securities. The Company has established
policies which limit the type, credit quality and length of maturity of the
securities in which it invests. The Company's investment policy allows no
investments in any single private issuer to exceed $1,000,000 and the
investments must have, at a minimum, a credit rating of AA. Cash equivalents and
restricted marketable securities at March 29, 1996 consist principally of
investments in money-market funds, commercial paper and U.S. government-agency
obligations and are classified as available for sale. Restricted marketable
securities are carried at amortized cost, which approximates market. Unrealized
gains and losses are immaterial.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable; however, this risk is limited
due to the large number of individually smaller customers. Collateral is not
required on these transactions. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management
expectations.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method. Cost includes direct materials,
direct labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
which range from two to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized while maintenance and repairs
are charged to expense as incurred.
WARRANTIES
The Company's products are generally under warranty against defects in
material and workmanship for a period of one year. The Company accrues for
estimated future warranty costs at the time of sale.
F-7
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial reporting and income tax bases of assets and liabilities.
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares are included in determining net loss per share,
to the extent they are dilutive, using the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, short-term bank borrowings and
current portion of long-term debt approximate fair value due to the short
maturity of those instruments.
The fair value of the Company's long-term debt, which approximates its
carrying value, is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of
similar maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") which
requires the Company to review for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be recognized.
The Company will adopt FAS 121 during fiscal 1997 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will adopt FAS 123 during fiscal 1997. The Company
intends to continue to account for employee stock options using the intrinsic
value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only"
pro forma alternative described in FAS 123.
F-8
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. BALANCE SHEET COMPOSITION
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Accounts receivable.......................................... $ 689,000 $ $1,189,000
Less allowance for doubtful accounts and sales returns....... (25,000) (82,000)
-------------- --------------
$ 664,000 $ 1,107,000
-------------- --------------
-------------- --------------
</TABLE>
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Raw materials................................................ $ 854,000 $ 875,000
Work-in-process.............................................. 167,000 380,000
Finished goods............................................... 330,000 655,000
-------------- --------------
$ 1,351,000 $ 1,910,000
-------------- --------------
-------------- --------------
</TABLE>
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Machinery and equipment...................................... $ 4,137,000 $ 4,322,000
Furniture and fixtures....................................... 276,000 280,000
Computer equipment........................................... 833,000 866,000
Leasehold improvements....................................... 203,000 215,000
Construction-in-progress..................................... 41,000 131,000
-------------- --------------
5,490,000 5,814,000
Less accumulated depreciation and amortization............... (3,308,000) (3,773,000)
-------------- --------------
$ 2,182,000 $ 2,041,000
-------------- --------------
-------------- --------------
</TABLE>
Property and equipment include assets under capital leases of $1,116,000 and
$841,000 and accumulated depreciation of $1,011,000 and $802,000 at March 31,
1995 and March 29, 1996, respectively.
3. SHORT-TERM BANK BORROWING
In December 1993, the Company entered into an agreement with a bank for a $3
million revolving line of credit. While the agreement is in effect, the Company
is required to maintain on deposit with the bank $3,750,000 of marketable
securities as pledged collateral, restricted as to use when the Company has any
outstanding borrowings under the agreement. The Company has the option of
selecting an interest rate on borrowings under the agreement based on the bank's
reference rate, LIBOR or the bank's short-term certificate-of-deposit rates
(ranging from 5.5% to 9.0%). The Company is not required to pay any commitment
fees on the unused available credit. The agreement expires on October 31, 1996.
As of March 29, 1996, there was $250,000 outstanding under the agreement.
F-9
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 29,
1996
------------
<S> <C>
Note payable, bearing interest at 16%, with monthly installments of $53,000, and
secured by fixed assets, inventory and a portion of accounts receivable........ $ 1,298,000
Less current portion............................................................ (499,000)
------------
Long-term portion............................................................... $ 799,000
------------
------------
</TABLE>
The note contains various provisions including requirements to maintain
$3,000,000 or more in cash, cash equivalents and restricted marketable
securities, net of all non-subordinated debt outstanding, and maintain a
security deposit in the amount of $150,000 payable to the lender in the event of
a default on the note. If the Company's cash and restricted marketable
securities were to fall below $3,000,000, the Company would be required to
deposit with the lender an additional $200,000 as a security deposit.
Annual maturities under the note are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 499,000
1998............................................................................ 496,000
1999............................................................................ 303,000
------------
Total....................................................................... $ 1,298,000
------------
------------
</TABLE>
5. LEASES
The Company leases office and laboratory facilities under a noncancellable
operating lease which expires in 2000. The lease provides for renewal options
and options for expansion or reduction of the initial rental space. Rent expense
was $300,000, $300,000, and $195,000 for fiscal 1994, 1995 and 1996,
respectively.
The Company also leases equipment and furniture under capital leases which
contain renewal options and/or options to purchase the equipment and furniture
at fair market value.
Future minimum payments required under capital and noncancellable operating
leases at March 29, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES TOTAL
- ----------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
1997....................................................... $ 35,000 $ 195,000 $ 230,000
1998....................................................... 7,000 200,000 207,000
1999....................................................... 5,000 205,000 210,000
2000....................................................... -- 205,000 205,000
--------- ---------- ----------
Total minimum lease payments............................... 47,000 $ 805,000 $ 852,000
---------- ----------
---------- ----------
Imputed interest........................................... (3,000)
---------
Present value of net minimum lease payments................ 44,000
Current portion of capital lease obligations............... (33,000)
---------
Capital lease obligations, less current portion............ $ 11,000
---------
---------
</TABLE>
F-10
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS
The Company has obtained rights to use certain technology in the manufacture
of certain of its products. The related agreements provide for the Company to
pay royalties ranging from 0.6% to 6% of net sales of the applicable products.
Total royalty expense for fiscal 1994, 1995 and 1996 was $140,000, $132,000 and
$381,000, respectively.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
shareholders.
WARRANTS
At March 29, 1996, there were warrants for 39,242 shares of Common Stock
outstanding at an exercise price of $3.50 per share, which expire on July 15,
1999.
EMPLOYEE STOCK PURCHASE PLAN
In April 1992, the Company adopted the Employee Stock Purchase Plan (the
"Plan") which reserved 75,000 shares of Common Stock to be issued in accordance
with the Internal Revenue Code under such terms as approved by the officers of
the Company. In fiscal 1996, 32,177 shares and 18,637 shares were purchased by
employees at prices of $1.59 and $2.01 per share, respectively. In August 1995,
the shareholders approved an increase in the number of shares reserved for
issuance under the Plan from 75,000 to 200,000.
STOCK INCENTIVE PROGRAM
The Board of Directors adopted the 1988 Stock Incentive Program (the
"Program") which provides that incentive stock options (ISOs) and nonqualified
stock options (NSOs) for shares of Common Stock may be granted to employees and
consultants of the Company. In accordance with the Program, the stated exercise
price shall not be less than 100% and 85% of the fair market value of Common
Stock on the date of grant for ISOs and NSOs, respectively. The Program provides
that the options shall be exercisable over a period not to exceed five years and
a day and shall vest at a rate of at least 25 percent each year over a four year
period. Vesting may be accelerated upon the occurrence of certain events as
described in the stock option agreement. In August 1995, the shareholders
approved an increase in the number of shares of Common Stock reserved for
issuance under the Program from 1,300,000 to 1,550,000.
As a result of the Company's initial public offering of Common Stock in June
1992, options issued in November 1991 were determined to have been issued at an
amount less than the fair market value of the Company's Common Stock at the date
the options were granted. The difference between the option price and the fair
market value of the Company's Common Stock was determined to contain a
compensatory element. The compensatory element resulted in a charge to
operations in fiscal 1994, 1995 and 1996 of $104,000, $72,000 and $39,000,
respectively.
In August 1994, the Company's Board of Directors approved a plan to offer
all current employees and consultants holding outstanding options to purchase
Common Stock of the Company with exercise prices in excess of $3.50 per share
the opportunity to exchange such options for options priced at $3.50 per share.
In exchange for the new options, the employees and consultants forfeited
approximately 25 percent of their vesting credit. At the time of the approval,
the fair market value of the Company's Common Stock was $2.50 per share.
F-11
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY (CONTINUED)
Stock option activity under the Program is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE PRICE
OPTIONS PER SHARE
------------ --------------
<S> <C> <C>
Balance, March 26, 1993......................................... 943,411 $ .20-$15.25
Granted....................................................... 290,652 $ 5.25-$ 7.13
Exercised..................................................... (237,234) $ .20-$ 5.00
Cancelled..................................................... (221,526) $ .20-$13.50
------------
Balance, March 25, 1994......................................... 775,303 $ .20-$15.25
Granted....................................................... 860,381 $ 1.75-$ 3.50
Exercised..................................................... (47,161) $ .20-$ 5.00
Cancelled..................................................... (709,495) $ .20-$15.25
------------
Balance, March 31, 1995......................................... 879,028 $ .20-$10.50
Granted....................................................... 212,923 $ 1.75-$ 6.56
Exercised..................................................... (79,885) $ .20-$ 3.50
Cancelled..................................................... (136,383) $ .20-$ 3.50
------------
Balance, March 29, 1996......................................... 875,683 $ .20-$10.50
------------
------------
</TABLE>
As of March 29, 1996, options for 518,244 shares of Common Stock were
exercisable.
8. INCOME TAXES
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1995 1996
-------------- --------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards............................ $ 16,417,000 $ 17,611,000
Research and development tax credit
carryforwards.............................................. 1,881,000 1,963,000
Capitalized research and development........................ 456,000 487,000
Other....................................................... 300,000 (756,000)
Valuation allowance for deferred tax assets................. (19,054,000) (19,305,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company has net operating loss carryforwards available to reduce taxable
income through 2011 for federal and state income tax purposes of approximately
$46,044,000 and $21,035,000, respectively. Additionally, the Company has
research and development credit carryforwards available to reduce taxes payable
through 2011 for federal and state income tax purposes of approximately
$1,470,000 and $493,000, respectively.
As a result of the Series C Preferred Stock offerings in May 1990, there is
an annual limitation of approximately $1,500,000 for federal and state income
tax purposes on the use of approximately $8,100,000 and $1,080,000 of net
operating losses, and of $390,000 and $160,000 of tax credit carryforwards,
respectively. Additionally, as a result of the Company's secondary offering in
December 1992, the Company's net operating losses and tax credit carryforwards
incurred prior to December 1992 are subject to an annual limitation of
approximately $5,450,000 for federal and state income tax reporting purposes on
the use of approximately $28,176,000 and $8,099,000 of net operating loss
carryforwards,
F-12
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
respectively, and of $1,151,000 and $379,000 of tax credit carryforwards,
respectively. If the amount of these limitations are not utilized in any year,
the amount not utilized increases the allowable limit in the subsequent year.
9. RETIREMENT SAVINGS PLAN
Effective in September 1990, the Company adopted the Cholestech Corporation
Retirement Savings Plan (the "401(k) Plan") that covers all employees of the
Company. An eligible employee may elect to defer, in the form of contributions
to the 401(k) Plan, between 1% and 15% of the total compensation that would
otherwise be paid to the employee, not to exceed $9,240 per year (adjusted for
cost-of-living increases). Employee contributions are invested in selected
mutual funds or a money market fund according to the directions of the employee.
The contributions are fully vested and nonforfeitable at all times. The 401(k)
Plan provides for employer contributions as determined by the Board of
Directors. The Company has not made any contributions through fiscal 1996.
10. SUBSEQUENT EVENTS
In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems to develop an immunoassay test
cassette incorporating Metra Biosystems bone resporation technology to be used
with the L-D-X System. Pursuant to the Agreement, Metra Biosystems purchased
39,526 shares of the Company's Common Stock for an aggregate purchase price of
$250,000 ($6.325 per share) and is obligated to purchase $750,000 of additional
shares of Common Stock upon the completion of specified milestones by the
Company.
On May 9, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission to register for sale 3,450,000 shares of
Common Stock, which includes 450,000 shares related to the over-allotment
option.
F-13
<PAGE>
[LOGO] [PICTURE OF CASSETTE]
- --------------------------------------------------------------------------------
CHOLESTECH L'D'X-REGISTERED TRADEMARK- PROCEDURE
Step 1: Take a blood sample from a fingerstick.
Step 2: Deposit the blood into the sample well of the test cassette.
Step 3: Insert the test cassette into the L-D-X Analyzer and press the "RUN"
button.
Step 4: In less than five minutes, the
L-D-X Analyzer displays the test results.
<PAGE>
- --------------------------------------------
--------------------------------------------
- --------------------------------------------
--------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 5
The Company...................................... 14
Use of Proceeds.................................. 15
Price Range of Common Stock...................... 16
Dividend Policy.................................. 16
Capitalization................................... 17
Dilution......................................... 18
Selected Financial Data.......................... 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 20
Business......................................... 25
Management....................................... 44
Certain Relationships and Related Transactions... 51
Principal Shareholders........................... 52
Description of Capital Stock..................... 53
Underwriting..................................... 55
Legal Matters.................................... 56
Experts.......................................... 56
Additional Information........................... 56
Index to Financial Statements.................... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Vector Securities International, Inc.
Principal Financial Securities, Inc.
, 1996
- --------------------------------------------
--------------------------------------------
- --------------------------------------------
--------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 7,435
NASD Filing Fee........................................................... 22,063
Nasdaq National Market Listing Fee........................................ 17,500
Blue Sky Qualification Fees and Expenses.................................. 15,000
Printing and Engraving Expenses........................................... 125,000
Legal Fees and Expenses................................................... 200,000
Accounting Fees and Expenses.............................................. 75,000
Transfer Agent and Registrar Fees......................................... 2,500
Miscellaneous............................................................. 35,502
---------
TOTAL............................................................... $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
form a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, (ii) acts or omissions that
a director believes to be contrary to the best interests of the Registrant or
its shareholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the Registrant or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Registrant or
its shareholders, (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest, and (vii) liability for improper distributions, loans or guarantees.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Articles of Incorporation and Bylaws contain provisions covering indemnification
to the maximum extent permitted by the California General Corporation Law of
corporate directors, officers and other agents against certain liabilities and
expenses incurred as a result of proceedings involving such persons in their
capacities as directors, officers employees or agents, including proceedings
under the Securities Act or the Securities Exchange Act of 1934, as amended. The
Company has entered into Indemnification Agreements with its directors and
executive officers.
In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1993, the Registrant has issued and sold (without payment of
any selling commission to any person) 364,280 shares of Common Stock to
employees and consultants at prices ranging from $0.20 to $5.00 per share, upon
exercise of stock options and stock purchase rights, pursuant to the
Registrant's 1988 Stock Incentive Program.
In May 1996, the Registrant issued and sold (without payment of any selling
commission to any person) 39,526 shares of Common Stock to Metra Biosystems,
Inc. at a price of $6.325 per share.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act, as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationship with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement (draft dated May 7, 1996).
3.1(2) Restated Articles of Incorporation of Registrant.
3.2(1) Bylaws of Registrant, as amended.
4.1(1) Form of Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1(3) 1988 Stock Incentive Program and forms of agreements thereunder.
10.2(3) Employee Stock Purchase Plan.
10.3(1) Standard Industrial Lease Agreement between Registrant and Sunlife
Assurance Company of Canada dated October 22, 1989.
10.3.1(8) First Amendment to Standard Industrial Lease Agreement between Registrant
and Sunlife Assurance Company of Canada dated April 1995.
10.4(1) Forms of Indemnification Agreements between Registrant and its officers and
its directors.
10.5(1) Employment Agreement between Registrant and Edward L. Erickson dated
December 6, 1991.
10.6(1) Equipment Lease Agreement between Registrant and MMC/GATX Partnership No. 1
dated August 17, 1990.
10.6.1(1) Revised Warrant to Purchase Series D Preferred Stock issued to MMC/GATX
Partnership No. 1.
10.7(1) Master Lease Agreement between Registrant and LINC Venture Lease Partners
II L.P. dated June 13, 1991.
10.7.1(1) Amendment No. 1 to Warrant issued to LINC Venture Lease Partners II L.P.
10.8(1) Supply Agreement effective the 15th day of February 1991 by and between
Ciba Corning Diagnostics Corp. and the Registrant.
10.9(4) Employment Agreement between Registrant and Steven L. Barbato dated April
27, 1992.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10(4) Employment Agreement between Registrant and Robert J. Guyon dated July 13,
1992.
10.11.1(5) Letter Agreement effective September 28 1993 by and between Union Bank and
Registrant.
10.11.2(5) Promissory Note effective September 28 1993 by and between Union Bank and
Registrant.
10.11.3(5) Security Agreement effective September 28, 1993 by and between Union Bank
and Registrant.
10.11.4(7) First Amendment to the Letter Agreement by and between Union Bank and
Registrant.
10.11.5(7) First Amendment to the Promissory Note by and between Union Bank and
Registrant.
10.11.6(10) Second Amendment to the Letter Agreement by and between Union Bank and
Registrant.
10.11.7(10) Second Amendment to the Promissory Note by and between Union Bank and
Registrant.
10.12(4) License Agreement between Registrant and Eastman Kodak Company dated
December 23, 1992.
10.13(6) Employment Agreement between Registrant and Linda H. Masterson dated May
12, 1994.
10.14(9) Loan Agreement between Registrant and Phoenixcor, Inc. dated August 31,
1995.
10.15* Development, License and Distribution Agreement between Registrant and
Metra Biosystems, Inc. dated May 3, 1996.
10.16 Registration Rights Agreement between Registrant and Metra Biosystems, Inc.
dated May 3, 1996.
23.1 Consent of Price Waterhouse LLP, Independent Accountants (see page II-6).
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1).
23.3 Consent of Dehlinger & Associates.
24.1 Power of Attorney (See page II-4).
</TABLE>
- --------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit. The redacted portions have been filed separately with the
Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-47603) which became effective on June 26,
1992.
(2) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-54300) which became effective on December 16,
1992.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (No. 333-4148) as filed with the Securities and
Exchange Commission on April 26, 1996.
(4) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 26, 1993.
(5) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 23, 1993.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 24, 1994.
(7) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 23, 1994.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 29, 1995.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 29, 1995.
II-3
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES:
II -- Valuation and Qualifying Accounts
CHOLESTECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 25, 1994
Allowance for doubtful accounts.............................. $ 115,000 $ 11,000 $ 50,000 $ 76,000
Amortization of other assets................................. 60,000 142,000 -- 202,000
---------- ----------- ----------- ----------
$ 175,000 $ 153,000 $ 50,000 $ 278,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
FISCAL YEAR ENDED MARCH 31, 1995
Allowance for doubtful accounts.............................. $ 76,000 $ 17,000 $ 68,000 $ 25,000
Amortization of other assets................................. 202,000 142,000 -- 344,000
---------- ----------- ----------- ----------
$ 278,000 $ 159,000 $ 68,000 $ 369,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
FISCAL YEAR ENDED MARCH 29, 1996
Allowance for doubtful accounts.............................. $ 25,000 $ 57,000 $ -- $ 82,000
Amortization of other assets................................. 344,000 487,000 -- 831,000
---------- ----------- ----------- ----------
$ 369,000 $ 544,000 $ -- $ 913,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933 (the "Act"), the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Hayward, State of California, on the day of May 9, 1996.
CHOLESTECH CORPORATION
By /S/ WARREN E. PINCKERT II
------------------------------------
(Warren E. Pinckert II)
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Warren E. Pinckert and Richard H. Janney
and each one of them, acting individually and without the other, as his or her
attorney-in-fact, each with full power of substitution, for him and her in any
and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes may do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------------- ------------------------------------------------- ---------------
<C> <S> <C>
/S/ WARREN E. PINCKERT II
--------------------------------------------- President, Chief Executive Officer and Director May 9, 1996
(Warren E. Pinckert II) (Principal Executive Officer)
/S/ RICHARD H. JANNEY Vice President, Finance and Chief Financial
--------------------------------------------- Officer (Principal Financial and Accounting May 9, 1996
(Richard H. Janney) Officer)
/S/ HARVEY S. SADOW, PH.D.
--------------------------------------------- Chairman of the Board May 9, 1996
(Harvey S. Sadow, Ph.D.)
/S/ JOHN L. CASTELLO
--------------------------------------------- Director May 9, 1996
(John L. Castello)
/S/ H.R. SHEPHERD
--------------------------------------------- Director May 9, 1996
(H.R. Shepherd)
/S/ JOSEPH BUCHMAN, M.D.
--------------------------------------------- Director May 9, 1996
(Joseph Buchman, M.D.)
</TABLE>
II-5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 24, 1996, except as
to Note 11 which is as of May 9, 1996, relating to the financial statements of
Cholestech Corporation, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the three
years ended March 29, 1996 listed under Item 16(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
May 9, 1996
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------ -------------------------------------------------------------------------------- ---------------
<C> <S> <C>
1.1 Form of Underwriting Agreement (draft dated May 7, 1996). ......................
3.1(2) Restated Articles of Incorporation of Registrant. ..............................
3.2(1) Bylaws of Registrant, as amended. ..............................................
4.1(1) Form of Common Stock Certificate. ..............................................
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. ..............................
10.1(3) 1988 Stock Incentive Program and forms of agreements thereunder. ...............
10.2(3) Employee Stock Purchase Plan. ..................................................
10.3(1) Standard Industrial Lease Agreement between Registrant and Sunlife Assurance
Company of Canada dated October 22, 1989. ......................................
10.3.1(8) First Amendment to Standard Industrial Lease Agreement between Registrant and
Sunlife Assurance Company of Canada dated April 1995. ..........................
10.4(1) Forms of Indemnification Agreements between Registrant and its officers and its
directors. .....................................................................
10.5(1) Employment Agreement between Registrant and Edward L. Erickson dated December 6,
1991. ..........................................................................
10.6(1) Equipment Lease Agreement between Registrant and MMC/GATX Partnership No. 1
dated August 17, 1990. .........................................................
10.6.1(1) Revised Warrant to Purchase Series D Preferred Stock issued to MMC/GATX
Partnership No. 1. .............................................................
10.7(1) Master Lease Agreement between Registrant and LINC Venture Lease Partners II
L.P. dated June 13, 1991. ......................................................
10.7.1(1) Amendment No. 1 to Warrant issued to LINC Venture Lease Partners II L.P. .......
10.8(1) Supply Agreement effective the 15th day of February 1991 by and between Ciba
Corning Diagnostics Corp. and the Registrant. ..................................
10.9(4) Employment Agreement between Registrant and Steven L. Barbato dated April 27,
1992. ..........................................................................
10.10(4) Employment Agreement between Registrant and Robert J. Guyon dated July 13,
1992. ..........................................................................
10.11.1(5) Letter Agreement effective September 28 1993 by and between Union Bank and
Registrant. ....................................................................
10.11.2(5) Promissory Note effective September 28 1993 by and between Union Bank and
Registrant.
10.11.3(5) Security Agreement effective September 28, 1993 by and between Union Bank and
Registrant. ....................................................................
10.11.4(7) First Amendment to the Letter Agreement by and between Union Bank and
Registrant. ....................................................................
10.11.5(7) First Amendment to the Promissory Note by and between Union Bank and
Registrant. ....................................................................
10.11.6(10) Second Amendment to the Letter Agreement by and between Union Bank and
Registrant. ....................................................................
10.11.7(10) Second Amendment to the Promissory Note by and between Union Bank and
Registrant. ....................................................................
10.12(4) License Agreement between Registrant and Eastman Kodak Company dated December
23, 1992. ......................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------ -------------------------------------------------------------------------------- ---------------
10.13(6) Employment Agreement between Registrant and Linda H. Masterson dated May 12,
1994. ..........................................................................
<C> <S> <C>
10.14(9) Loan Agreement between Registrant and Phoenixcor, Inc. dated August 31,
1995. ..........................................................................
10.15* Development, License and Distribution Agreement between Registrant and Metra
Biosystems, Inc. dated May 3, 1996. ............................................
10.16 Registration Rights Agreement between Registrant and Metra Biosystems, Inc.
dated May 3, 1996. .............................................................
23.1 Consent of Price Waterhouse LLP, Independent Accountants (see page II-6). ......
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1). ...
23.3 Consent of Dehlinger & Associates...............................................
24.1 Power of Attorney (See page II-4). .............................................
</TABLE>
- --------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-47603) which became effective on June 26,
1992.
(2) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-54300) which became effective on December 16,
1992.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (No. 333-4148) as filed with the Securities and
Exchange Commission on April 26, 1996.
(4) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 26, 1993.
(5) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 23, 1993.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 24, 1994.
(7) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 23, 1994.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 29, 1995.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 29, 1995.
<PAGE>
3,000,000 Shares
CHOLESTECH CORPORATION
Common Stock
UNDERWRITING AGREEMENT
May __, 1996
VECTOR SECURITIES INTERNATIONAL, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Dear Sirs:
Cholestech Corporation, a California corporation (the "Company"),
proposes to issue and sell an aggregate of 3,000,000 shares of its common stock,
no par value per share (the "Initial Securities"), to the several Underwriters
named in Schedule I hereto (the "Underwriters") for whom Vector Securities
International, Inc. ("Vector") and Principal Financial Securities, Inc. are
acting as representatives (the "Representatives"). In addition, solely for the
purpose of covering over-allotments, the Company proposes to grant to the
several Underwriters, upon the terms and conditions set forth in Section 2
hereof, an option to purchase up to an additional 450,000 shares of common stock
of the Company (the "Option Securities"). The Initial Securities and the Option
Securities are hereinafter collectively referred to as the "Securities." The
Company's common stock, no par value per share, including the Securities, is
hereinafter referred to as the "Common Stock." The Company wishes to confirm as
follows its agreements with you and the other Underwriters on whose behalf you
are acting in connection with the several purchases by the Underwriters of the
Securities:
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (No. 333-_____) covering the registration of
the Securities under the Securities Act of 1933, as amended (the "1933 Act"),
including the related preliminary prospectus, or prospectuses, and either (A)
has prepared and filed, prior to the effective date of such registration
statement, an amendment to such registration statement, including a final
prospectus or (B) if the Company has elected to rely upon Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations"),
<PAGE>
will prepare and file a prospectus, in accordance with the provisions of Rule
430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after
execution and delivery of this Agreement. Additionally, if the Company has
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the
Company will prepare and file a term sheet (a "Term Sheet") in accordance with
the provisions of Rule 434 and Rule 424(b), promptly after execution and
delivery of this Agreement. The information, if any, included in such
prospectus or in such Term Sheet, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it becomes effective (a) pursuant to
paragraph (b) of Rule 430A, is referred to herein as the "Rule 430A
Information," or (b) pursuant to paragraph (d) of Rule 434, is referred to
herein as the "Rule 434 Information." Each prospectus used before the time such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information that was used
after effectiveness and prior to the execution and delivery of this Agreement is
herein called a "preliminary prospectus." Such registration statement,
including the exhibits and schedules thereto, at the time it became effective
and including, if applicable, the Rule 430A Information or the Rule 434
Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term Registration Statement shall include the Rule 462(b) Registration
Statement. The final prospectus in the form first furnished to the Underwriters
for use in connection with the offering of the Securities is herein referred to
as the "Prospectus." If Rule 434 is relied upon, the term "Prospectus" shall
refer to the preliminary prospectus last furnished to the Underwriters in
connection with the offering of the Securities, together with the Term Sheet,
and all references to the date of the Prospectus shall mean the date of the Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy, if any, filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $________ per
share (the "purchase price per share"), the number of Initial Securities set
forth in Schedule I opposite the name of such Underwriter under the column
"Number of Initial Securities to be Purchased from the Company" (or such number
of Initial Securities increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and
2
<PAGE>
conditions set forth herein, the Company hereby grants an option (the "over-
allotment option") to the Underwriters to purchase from the Company, at the
purchase price per share, up to an aggregate of 450,000 Option Securities.
Option Securities may be purchased solely for the purpose of covering over-
allotments made in connection with the offering of the Securities. Such option
shall expire at 5:00 P.M., Chicago time, on the 30th day after the date of this
Agreement (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). Such over-allotment option may be exercised at any time or from time
to time until its expiration. Upon any exercise of the over-allotment option,
each Underwriter, severally and not jointly, agrees to purchase from the Company
that proportion of the total number of Option Securities as is equal to the
percentage of Initial Securities that such Underwriter is purchasing from the
Company (or such number of Initial Securities increased as set forth in Section
10 hereof), subject to such adjustments as you may determine to avoid fractional
shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Underwriters propose to make a public offering of the Securities as
soon after the Registration Statement and this Agreement have become effective
as in your judgment is advisable and initially to offer the Securities upon the
terms set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Initial Securities shall be made at the
office of Skadden, Arps, Slate, Meagher & Flom, 333 West Wacker Drive, Suite
2100, Chicago, Illinois 60606, at 9:00 A.M., Chicago time, on the third
(fourth, if the pricing occurs after 4:30 p.m. (Eastern Time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10 hereof) (the "Closing Date"). The place of closing for
the Initial Securities and the Closing Date may be varied by agreement among you
and the Company.
Delivery to the Underwriters of and payment for any Option Securities
to be purchased by the Underwriters shall be made at the aforementioned office
of Skadden, Arps, Slate, Meagher & Flom at such time on such date (an "Option
Closing Date"), which may be the same as the Closing Date but shall in no event
be earlier than the Closing Date nor earlier than two nor later than ten
business days after the giving of the notice hereinafter referred to, as shall
be specified in a written notice from you on behalf of the Underwriters to the
Company of the Underwriters' determination to purchase a number, specified in
such notice, of Option Securities. The place of closing for any Option
Securities and the Option Closing Date for such Option Securities may be varied
by agreement between you and the Company.
Certificates for the Initial Securities and for any Option Securities
to be purchased hereunder shall be registered in such names and in such
denominations as you shall request by
3
<PAGE>
written notice (it being understood that a facsimile transmission shall be
deemed written notice) prior to 9:30 A.M., Chicago time, on the second business
day preceding the Closing Date or any Option Closing Date, as the case may be.
Such certificates shall be made available to you in Chicago, Illinois or New
York, New York, as requested by you in the aforesaid notice, for inspection and
packaging not later than 9:30 A.M., Chicago time, on the business day next
preceding the Closing Date or an Option Closing Date, as the case may be. The
certificates evidencing the Initial Securities and any Option Securities to be
purchased hereunder shall be delivered to you on the Closing Date or the Option
Closing Date, as the case may be, against payment of the purchase price therefor
by certified or official bank check or checks payable in New York Clearing House
(next day) funds to the order of the Company. It is understood that each
Underwriter has authorized you, for its account, to accept delivery of,
acknowledge receipt of, and make payment of the purchase price for, the Initial
Securities and the Option Securities, if any, which it has agreed to purchase.
Vector, individually and not as representative of the Underwriters, may (but
shall not be obligated to) make payment of the purchase price for the Initial
Securities or the Option Securities, if any, to be purchased by any Underwriter
whose check has not been received by the Closing Date or the Option Closing
Date, as the case may be, but such payment shall not relieve such Underwriter
from its obligations hereunder.
5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters as follows:
a. The Company will notify the Underwriters immediately, and
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendment thereto, (ii) of the receipt of any comments from
the Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the suspension of
qualification of the Securities for offering or sale in any jurisdiction or the
initiation of any proceedings for such purpose and (v) during the period when
the Prospectus is required to be delivered under the 1933 Act or Securities
Exchange Act of 1934, as amended (the "1934 Act"), of any change, or any event
or occurrence which could result in such a change, in the Company's condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company or the happening of any event, including the filing of any
information, documents or reports pursuant to the 1934 Act, that makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the making
of any additions to or changes in the Registration Statement or the Prospectus
in order to state a material fact required by the 1933 Act or the 1933 Act
Regulations to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectus to comply with the 1933 Act, the 1933 Act
4
<PAGE>
Regulations or any other law. The Company shall use its best efforts to prevent
the issuance of any stop order or order suspending the qualification or
exemption of the Securities under any state securities or Blue Sky laws, and, if
at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities commission
or other regulatory authority shall issue an order suspending the qualification
or exemption of the Securities under any state securities or Blue Sky laws, the
Company shall use every reasonable effort to obtain the withdrawal or lifting of
such order at the earliest possible time.
b. The Company will give the Underwriters notice of its
intention to prepare or file any amendment to the Registration Statement
(including any post-effective amendment), any Rule 462(b) Registration
Statement, any Term Sheet or any amendment or supplement to the Prospectus
(including any revised prospectus or Term Sheet and preliminary prospectus which
the Company proposes for use by the Underwriters in connection with the offering
of the Securities which differs from the prospectus on file at the Commission at
the time the Registration Statement becomes effective, whether or not such
revised prospectus or Term Sheet and preliminary prospectus is required to be
filed pursuant to Rule 424(b)), whether pursuant to the 1933 Act, the 1934 Act
or otherwise, will furnish the Underwriters with copies of any Rule 462(b)
Registration Statement, Term Sheet, amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such Rule 462(b) Registration Statement, Term Sheet, amendment or
supplement or use any such prospectus to which the Underwriters or counsel for
the Underwriters shall object.
c. The Company has furnished or will deliver to the Underwriters
and their counsel, without charge, as many signed and conformed copies of the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Underwriters may reasonably request. If applicable, the copies of the
Registration Statement and each amendment thereto furnished to the Underwriters
will be identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
d. The Company will furnish to each Underwriter, without charge,
from time to time during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request for the purposes contemplated by the 1933 Act, the 1934 Act, the 1933
Act Regulations or the rules and regulations of the Commission under the 1934
Act (the "1934 Act Regulations"). If applicable, the Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
5
<PAGE>
e. The Company will comply with the 1933 Act and the 1933 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated in this Agreement and in the Prospectus. If at any time when a
prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act Regulations
or the 1934 Act Regulations to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 5(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements and the
Company will furnish to the Underwriters such number of copies of such amendment
or supplement as the Underwriters may reasonably request.
f. During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission or the Nasdaq National
Market ("NASDAQ"), and (ii) from time to time such other information concerning
the Company as you may request.
g. The Company will use its best efforts, in cooperation with
counsel to the Underwriters, to qualify the Securities for offering and sale
under the applicable securities or Blue Sky laws of such states and other
jurisdictions of the United States as the Underwriters may designate and to
maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
obligated to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
h. The Company will make generally available to its security
holders as soon as practicable, but not later than 45 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next fol-
6
<PAGE>
lowing the "effective date" (as defined in said Rule 158) of the Registration
Statement.
i. The Company will use the net proceeds received by it from the
sale of the Securities in the manner specified in the Prospectus under "Use of
Proceeds."
j. If, at the time that the Registration Statement becomes
effective, any Rule 430A Information or Rule 434 Information shall have been
omitted therefrom, then immediately following the execution of this Agreement,
the Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a Prospectus or
Term Sheet containing such Rule 430A Information and Rule 434 Information,
respectively, or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing such Rule
430A Information.
k. If the Company elects to rely upon Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern Time on
the date hereof and (ii) the time confirmations are sent or given, as specified
by Rule 462(b)(2).
l. The Company, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, will file all
documents required to be filed with the Commission pursuant to Section 13, 14 or
15 of the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.
m. During a period of 90 days from the date of the Prospectus,
the Company will not, without the prior written consent of Vector, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any share
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of security outstanding on
the date hereof and referred to in the Prospectus, (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectus or (D) any
shares of Common Stock issued pursuant to any non-employee director stock plan.
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n. The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
o. The Company will supply the Underwriters with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Securities under the 1933 Act.
p. Prior to the Closing Date, the Company shall furnish to the
Underwriters, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company, for any periods
subsequent to the periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
q. Prior to the Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company, the condition, financial or otherwise,
or the earnings, business affairs or business prospects of it, or the offering
of the Securities, without the prior written consent of the Representatives
unless in the judgment of the Company and its counsel, and after notification to
the Representatives, such press release or communication is required by law.
r. The Company will comply with all provisions of Florida H.B.
1771, codified as Section 517.075 of the Florida statutes, and all regulations
promulgated thereunder relating to issuers doing business with Cuba.
s. The Company has not taken, nor will it take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
t. The Company will use its best efforts to maintain the
quotation of the Common Stock (including the Securities) on NASDAQ and will file
with NASDAQ all documents and notices required by NASDAQ of companies that have
securities that are traded in the over-the-counter market and quotations for
which are reported by NASDAQ.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a. When the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto becomes effective, at the
date of the Prospectus, if different, and at the Closing Date and the Option
Closing Date, as the case may be, (i) the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied or will comply in all material respects with the requirements of the
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1933 Act and the 1933 Act Regulations and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
The Prospectus and any supplements or amendments thereto will not at the date of
the Prospectus, at the date of any such supplements or amendments, or at the
Closing Date or the Option Closing Date, if any, include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially different,"
as such term is used in Rule 434, from the Prospectus included in the
Registration Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or omissions from
the Registration Statement or Prospectus relating to any Underwriter made in
reliance upon and in conformity with information furnished to the Company in
writing by any Underwriter, through Vector expressly for use in the Registration
Statement or Prospectus. The Company has not distributed any offering materials
in connection with the offering or sale of the Securities other than the
Registration Statement, the preliminary prospectus, the Prospectus, the Term
Sheet, if applicable, or any other materials, if any, permitted by the 1933 Act
or the 1933 Act Regulations.
b. Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and, if applicable,
each preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
c. The accountants who certified the financial statements and
supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act Regulations.
d. The financial statements included in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of their operations for the
periods specified; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein. The financial information and statistical data
set forth in the Prospectus are prepared on an accounting basis consistent with
such financial statements.
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e. Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise stated
therein, (i) there has been no material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company, whether or not arising in the ordinary course of
business, (ii) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material with
respect to the Company, and (iii) there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its capital
stock. The Company has no material contingent obligations which are not
disclosed in the Registration Statement.
f. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not, singly or in the aggregate,
have a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company.
g. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee or director benefit plans or the exercise of
convertible securities referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable and have not been issued in
violation of or are not otherwise subject to any preemptive or other similar
rights; the Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable; the
certificates evidencing the Securities are in due and proper form under
California law; the authorized capital stock of the Company, including the
Securities, conforms to all statements relating thereto contained in the
Prospectus; and the issuance of the Securities is not subject to preemptive or
other similar rights. There are no outstanding subscriptions, options,
warrants, convertible or exchangeable securities or other rights granted to or
by the Company to purchase shares of Common Stock or other securities of the
Company and there are no commitments, plans or arrangements to issue any shares
of Common Stock or any security convertible into or exchangeable for Common
Stock, in each case other than as described in the Prospectus. Except as
described in
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the Prospectus, the Company does not own, directly or indirectly, any shares of
stock of any other entity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association or
other entity.
h. Except as disclosed in the Registration Statement and except
as would not, singly or in the aggregate, reasonably be expected to have a
material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company, (A) the Company
is in compliance with all applicable Environmental Laws, (B) the Company has all
permits, authorizations and approvals required under any applicable
Environmental Laws and is in compliance with the requirements of such permits
authorizations and approvals, (C) there are no pending or, to the best knowledge
of the Company, threatened Environmental Claims against the Company and (D)
under applicable law, there are no circumstances with respect to any property or
operations of the Company that are reasonably likely to form the basis of an
Environmental Claim against the Company.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority. "Environmental
Claims" means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
i. The Company is not in violation of its charter or in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan agreement,
deed, trust, note, lease, sublease, voting agreement, voting trust, or other
instrument or agreement to which the Company is a party or by which it may be
bound, or to which any of the property or assets of the Company is subject; and
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein and compliance by the Company with its
obligations hereunder have been duly authorized by all necessary corporate
action and will not conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to, any contract, indenture,
mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement,
voting trust or other instrument or agreement to which the Company is a party or
by which it may be bound, or to which any of the property or assets of the
Company is subject, nor will such action result in any violation of the
provisions of the charter or bylaws of the Company
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or any applicable statute, law, rule, regulation, ordinance, decision, directive
or order.
j. No labor dispute with the employees of the Company exists or,
to the best knowledge of the Company, is imminent; and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors which might, singly or in the
aggregate, be expected to result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company.
k. There is no action, suit or proceeding before or by any court
or governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company, which is
required to be disclosed in the Registration Statement (other than as disclosed
therein), or which, singly or in the aggregate, might result in any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company, or which, singly or in
the aggregate, might materially and adversely affect the properties or assets
thereof or which might materially and adversely affect the consummation of this
Agreement; all pending legal or governmental proceedings to which the Company is
a party or of which any of its property or assets is the subject which are not
described in the Registration Statement, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not material; and
there are no contracts or documents of the Company which are required to be
filed as exhibits to the Registration Statement by the 1933 Act or by the 1933
Act Regulations which have not been so filed.
l. The Company owns or is licensed to use all patents, patent
applications, inventions, trademarks, trade names, applications for registration
of trademarks, service marks, service mark applications, copyrights, know-how,
manufacturing processes, formulae, trade secrets, licenses and rights in any
thereof and any other intangible property and assets (herein called the
"Proprietary Rights") which are material to the businesses of the Company as now
conducted and as proposed to be conducted, in each case as described in the
Prospectus. The description of the Proprietary Rights is correct in all
material respects and fairly and correctly describes the Company's rights with
respect thereto. The Company does not have any knowledge of, and the Company
has not given or received any notice of, any pending conflicts with or
infringement of the rights of others with respect to any Proprietary Rights or
with respect to any license of Proprietary Rights. No action, suit,
arbitration, or legal, administrative or other proceeding, or investigation is
pending, or, to the best knowledge of the Company, threatened, which involves
any Proprietary Rights. The Company is not subject to any judgment, order,
writ, injunction or decree of any court or any Federal, state, local, foreign or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any arbitrator, or has entered into or
is a party to any contract which restricts or impairs the use of
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<PAGE>
any such Proprietary Rights in a manner which would have a material adverse
effect on the use of any of the Proprietary Rights. To the best knowledge of
the Company, no Proprietary Rights used by the Company, and no services or
products sold by the Company, conflict with or infringe upon any proprietary
rights available to any third party. The Company has not received written
notice of any pending conflict with or infringement upon such third-party
proprietary rights. The Company has not entered into any consent,
indemnification, forbearance to sue or settlement agreement with respect to
Proprietary Rights other than in the ordinary course of business. No claims
have been asserted by any person with respect to the validity of the Company's
ownership or right to use the Proprietary Rights and, to the best knowledge of
the Company, there is no reasonable basis for any such claim to be successful.
The Proprietary Rights are valid and enforceable and no registration relating
thereto has lapsed, expired or been abandoned or cancelled or is the subject of
cancellation or other adversarial proceedings, and all applications therefore
are pending and are in good standing. The Company has complied, in all material
respects, with its contractual obligations relating to the protection of the
Proprietary Rights used pursuant to licenses. To the best knowledge of the
Company, no person is infringing on or violating the Proprietary Rights owned or
used by the Company.
m. No registration, authorization, approval, qualification or
consent of any court or governmental authority or agency is necessary in
connection with the offering, issuance or sale of the Securities hereunder,
except such as may be required under the 1933 Act or the 1933 Act Regulations or
state securities or Blue Sky laws (or such as may be required by the National
Association of Securities Dealers, Inc. ("NASD")).
n. The Company possesses and is operating in compliance with all
licenses, certificates, consents, authorities, approvals and permits
(collectively, "permits") from all state, Federal, foreign and other regulatory
agencies or bodies necessary to conduct the businesses now operated by it, and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such permit or any circumstance which would
lead it to believe that such proceedings are reasonably likely which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially and adversely affect the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company.
o. This Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by Federal or state
securities laws or the public policy underlying such laws.
p. Except as described in the Prospectus, there are no persons
with registration or other similar rights to have any
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<PAGE>
securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
q. No order preventing or suspending the use of any preliminary
prospectus has been issued and no proceedings for that purpose are pending,
threatened, or, to the knowledge of the Company, contemplated by the Commission;
and to the best knowledge of the Company, no order suspending the offering of
the Securities in any jurisdiction designated by the Underwriters pursuant to
Section 5(g) of this Agreement has been issued and, to the best knowledge of the
Company, no proceedings for that purpose have been instituted or threatened or
are contemplated.
r. The Company has good and marketable title to its properties,
free and clear of all material security interests, mortgages, pledges, liens,
charges, encumbrances, claims and equities of record. The properties of the
Company are, in the aggregate, in good repair (reasonable wear and tear
excepted), and suitable for its respective uses. Any real properties held under
lease by the Company is held by it under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
conduct of the business of the Company.
s. The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
t. The Company has conducted and is conducting its business in
compliance with all applicable Federal, state, local and foreign statutes, laws,
rules, regulations, ordinances, codes, decisions, decrees, directives and
orders, except where the failure to do so would not, singly or in the aggregate,
have a material adverse effect on the condition, financial or otherwise, or on
the earnings, business affairs or business prospects of the Company.
u. To the best of the Company's knowledge, neither the Company
nor any employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
v. The Company is not now, and after sale of the Securities to
be sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company"
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within the meaning of the Investment Company Act of 1940, as amended.
w. All offers and sales of capital stock of the Company prior to
the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the 1933 Act and were duly registered or subject to
an available exemption from the registration requirements of the applicable
state securities or Blue Sky laws.
x. The Company has complied with all provisions of Florida H.B.
1771, codified as Section 517.075 of the Florida statutes, and all regulations
promulgated thereunder relating to issuers doing business with Cuba.
y. The Common Stock is registered pursuant to Section 12(g) of
the 1934 Act. The Securities have been duly authorized for quotation on NASDAQ.
The Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the 1934 Act or delisting
the Common Stock from NASDAQ, nor has the Company received any notification that
the Commission or NASDAQ is contemplating terminating such registration or
listing.
z. Neither the Company nor, to its knowledge, any of its
officers, directors or affiliates has taken, and at the Closing Date and at any
later Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Securities.
aa. The Company maintains insurance of the types and in amounts
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar business, including but not limited to, insurance
covering clinical trial liability, product liability and real and personal
property owned or leased against theft, damage, destruction, acts of vandalism
and all other risks customarily insured against, all of which insurance is in
full force and effect.
ab. The Company has filed all material tax returns required to
be filed, which returns are true and correct in all material respects, and the
Company is not in default in the payment of any taxes, including penalties and
interest, assessments, fees and other charges, shown thereon due or otherwise
assessed, other than those being contested in good faith and for which adequate
reserves have been provided or those currently payable without interest which
were payable pursuant to said returns or any assessments with respect thereto.
ac. Except as described in the Prospectus, to the best of the
Company's knowledge, there are no rulemaking or similar proceedings before The
United States Food and Drug Administration
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or comparable Federal, state, local or foreign government bodies which involve
or affect the Company, which, if the subject of an action unfavorable to the
Company, could involve a prospective material adverse change in or effect on the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company.
ad. The Company has not received any communication (whether
written or oral) relating to the termination or threatened termination or
modification or threatened modification of any material, consulting, licensing,
marketing, research and development, cooperative or any similar agreement,
including, without limitation, the collaborative research and license agreements
listed under the section of the Prospectus entitled, "Strategic Relationships."
Each such collaborative and licensing agreement is in effect substantially as
described in such section of the Prospectus.
ae. To the knowledge of the Company, if any full-time employee
identified in the Prospectus has entered into any non-competition, non-
disclosure, confidentiality or other similar agreement with any party other than
the Company, such employee is neither in violation thereof nor is expected to be
in violation thereof as a result of the business conducted or expected to be
conducted by the Company as described in the Prospectus or such person's
performance of his obligations to the Company; and the Company has not received
written notice that any consultant or scientific advisor of the Company is in
violation of any non-competition, non-disclosure, confidentiality or similar
agreement.
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless (i) each
Underwriter and (ii) each person, if any, who controls any Underwriter within
the meaning of Section 15 of the 1933 Act (any of the persons referred to in
this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective directors, officers, partners and employees of any of the
Underwriters or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities and expenses whatsoever (including, without limitation, all
reasonable costs of pursuing, investigating and defending any claim, suit or
action or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person), directly or indirectly, caused by, related to, based
upon or arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any amendment thereto, including the Rule 430A Information and Rule 434
Information, if applicable, or any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading or caused by, related to, based upon,
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arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information relating to such Underwriter furnished in writing to the Company
by or on behalf of any Underwriter through you expressly for use in connection
therewith.
b. If any action, suit or proceeding shall be brought against
any Indemnified Person in respect of which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify the parties against whom
indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Indemnified Person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel or
(iii) the named parties to any such action, suit, investigation or proceeding
(including any impleaded parties) include both such Indemnified Person and the
indemnifying parties and representation of such Indemnified Person and any
indemnifying party by the same counsel would, in the reasonable judgment of the
Indemnified Person, be inappropriate due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Indemnified Person). It is understood, however, that the indemnifying parties
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Indemnified Persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by Vector, and
that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, which consent shall
not be unreasonably withheld, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Indemnified Person, to the extent provided in the
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preceding paragraph, from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
c. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person who controls the Company within the
meaning of Section 15 of the 1933 Act, to the same extent as the foregoing
indemnity from the Company to each Indemnified Person, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through Vector expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus, or any amendment or supplement
thereto. If any action, suit, investigation or proceeding shall be brought
against the Company, any of its directors, any such officer or any such
controlling person based on the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Underwriter pursuant to this
paragraph (c), such Underwriter shall have the rights and duties given to the
Company by paragraph (b) above, and the Company, its directors, any such officer
and any such controlling person shall have the rights and duties given to the
Indemnified Persons by paragraph (a) above.
d. If the indemnification provided for in this Section 7 is
unavailable to, or insufficient to hold harmless, an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law
or judicial determination, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other hand, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus or, if Rule
434 is used, the corresponding location on the Term Sheet. The relative fault
of the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement
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or omission. The indemnity and contribution obligations of the Company set
forth herein shall be in addition to any liability or obligation the Company may
otherwise have to any Indemnified Person.
e. The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
a PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 7, no
Underwriter (or any of its related Indemnified Persons) shall be required to
contribute (whether pursuant to subsection (a) or (c) or otherwise) any amount
in excess of the underwriting discount applicable to the Securities underwritten
by such Underwriter. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7 are several
in proportion to the respective numbers of Securities set forth opposite their
names in Schedule I hereto (or such numbers of Securities increased as set forth
in Section 10 hereof) and not joint.
f. No indemnifying party shall, without the prior written
consent of the Indemnified Person, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any Indemnified Person
is or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such action, suit or proceeding.
g. Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Indemnified Person, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Securities and payment therefor hereunder and (iii) any termination of this
Agreement.
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8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase the Initial Securities hereunder are subject to
the following conditions:
a. The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective on the date hereof; no stop
order suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission. If the Company has elected to rely upon Rule 430A, Rule 430A
Information previously omitted from the effective Registration Statement
pursuant to Rule 430A shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) within the prescribed time period and the Company shall
have provided evidence satisfactory to the Underwriters of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A. If the Company has elected to rely upon Rule 434, a Term Sheet shall
have been transmitted to the Commission for filing pursuant to Rule 424(b)
within the prescribed time period.
b. The Underwriters shall have received:
(i) The favorable opinion, dated as of the Closing Date, of
Wilson Sonsini Goodrich & Rosati, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
A. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of California.
B. The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus and to enter into and
perform its obligations under this Agreement.
C. To the best of their knowledge and information, the Company
is duly qualified as a foreign corporation to transact business and is
in good standing in each jurisdiction in which such qualification is
required.
D. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization"
(except for subsequent issuances, if any, pursuant to reservations,
agreements, employee benefit plans or the exercise of convertible
securities referred to in the Prospectus), and the shares of issued
and outstanding capital stock of the Company, including the Common
Stock, have been duly authorized and validly issued and are fully paid
and non-assess-
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able and, to their knowledge and information, have not been issued in
violation of or are not otherwise subject to any preemptive rights or
other similar rights.
E. The Securities have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued
and fully paid and non-assessable; and the issuance of the Securities
is not subject to preemptive or other similar rights.
F. To the best of their knowledge and information, except as
described in the Prospectus, there are no outstanding options,
warrants or other rights granted to or by the Company to purchase
shares of Common Stock or other securities of the Company and there
are no commitments, plans or arrangements to issue any shares of
Common Stock or other securities.
G. This Agreement has been duly authorized, executed and
delivered by the Company.
H. At the time the Registration Statement became effective and
at the Closing Date, the Registration Statement (other than the
financial statements and supporting schedules included therein, as to
which no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
I. The form of certificate used to evidence each of the
Securities is in due and proper form and complies with all applicable
statutory requirements.
J. To the best of their knowledge and information, there are no
legal or governmental proceedings pending or threatened which are
required to be disclosed in the Registration Statement other than
those disclosed therein, and all pending legal or governmental
proceedings to which the Company is a party or to which any of its
property is subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material.
K.The information in the Prospectus under "Risk Factors--Shares
Eligible for Future Sale; Registration Rights," "Certain Relationships
and
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Related Transactions," "Business--Strategic Relationships," --
Government Regulation," "Management--Director Compensation," "--1988
Stock Incentive Program," "--Employee Stock Purchase Plan," "--401(k)
Plan," "--Employment Agreements and Change in Control Arrangements,"
"Limitation on Liability and Indemnification Matters" and "Description
of Capital Stock," to the extent that it constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by them and is correct in all material
respects and fairly and correctly presents the information called for
with respect thereto.
L. To the best of their knowledge and information, there are no
contracts, indentures, mortgages, loan agreements, deeds, trusts,
notes, leases, subleases, voting trusts, voting agreements or other
instruments or agreements required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto other
than those described or referred to therein or filed as exhibits
thereto, the descriptions thereof or references thereto are correct;
and to the best of their knowledge and information, no default exists
in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, deed, trust, note, lease,
sublease, voting trust, voting agreement or other instrument or
agreement of the Company.
M. No authorization, approval, consent or order of any court or
governmental authority or agency is required in connection with the
offering, issuance or sale of the Securities to the Underwriters,
except such as may be required under the 1933 Act or the 1933 Act
Regulations or state securities or Blue Sky laws or such as may be
required by the NASD; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and the compliance by the Company with its obligations
hereunder will not conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to,
any contract, indenture, mortgage, loan agreement, note, deed, trust,
lease, sublease, voting trust, voting agreement or other instrument or
agreement to which the Company is a party or by which it may be bound,
or to which any of the property or assets of the Company is subject,
nor will such action result in any violation of the provisions of the
charter or bylaws of the Company, or
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<PAGE>
any applicable statute, law, rule, regulation, ordinance, code,
decision, directive or order.
N. To the best of their knowledge and information, the Company
possesses and is in compliance with all permits issued by the
appropriate regulatory body or agency, including the Food and Drug
Administration and any foreign regulatory agency performing similar
functions, necessary to conduct the businesses now operated by it,
except where the failure to so possess or comply with any permit would
not have, singly or in the aggregate, a material adverse effect on the
business or condition, financial or otherwise, of the Company. To the
best of their knowledge and information, there are no proceedings,
pending or threatened, which if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the business or condition, financial or otherwise, of the Company.
O. Except as described in the Prospectus, to the best of their
knowledge and information, there are no persons with registration or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under
the 1933 Act.
P. The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
Q. To the best of their knowledge and information, the Company
is in compliance with, and conducts its business in conformity with,
all applicable laws and regulations relating to the operation of its
business as described in the Registration Statement, except to the
extent that any failure so to comply or conform would not have a
material adverse effect upon the business or condition, financial or
otherwise, of the Company.
R. The Registration Statement has become effective under the
1933 Act; any required filing of the Prospectus, and any supplements
thereto or the Term Sheet, pursuant to Rule 424(b) and if applicable,
Rule 434, has been made in the manner and within the time period
required; and to their best knowledge and information, no stop order
suspending the effectiveness of the Registration Statement or any part
thereof has been issued and no proceedings therefor have been
instituted or are pending or contemplated under the 1933 Act.
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<PAGE>
(ii) The favorable opinion, dated as of the Closing Date,
of _______________, patent counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. To the best of their knowledge, the information in the
Prospectus under "Risk Factors--Uncertainty of Patent Position and
Proprietary Technology Protection; Need to License Technology of Third
Parties" and "--Patents and Proprietary Rights," to the extent that it
constitutes matters of law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been reviewed by them and is
correct in all material respects and fairly and correctly presents the
information called for with respect thereto.
B. To the best of their knowledge, there are no pending or
threatened legal or governmental proceedings, nor allegations on the
part of any person of infringement, relating to patent rights, trade
secrets, trademarks, service marks, copyrights or other proprietary
information or know-how of the Company and, to the best of their
knowledge, no such proceedings are threatened or contemplated;
C. To the best of their knowledge, the Company is not infringing
or otherwise violating any patents, trade secrets, trademarks, service
marks, copyrights or other proprietary information or know-how of any
persons, and no person is infringing or otherwise violating any of the
Company's patents, trade secrets, trademarks, service marks,
copyrights or other proprietary information or know-how of the Company
in a way which could materially affect the use thereof by the Company;
D. To the best of their knowledge, the Company owns or possesses
sufficient licenses or other rights to use all patents, trade secrets,
trademarks, service marks or other proprietary information or know-how
necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus;
E. The Company is listed in the records of the United States
Patent and Trademark Office ("PTO") as the sole assignee of record of
each of the patents listed on Schedule I hereto (herein called the
"Patents") and each of the applications listed on Schedule II hereto
(herein called the "Applications"). To the best of their knowledge,
there are no asserted or unasserted claims of any persons relating to
the scope or ownership of the Patents or the Applications, there are
no liens
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<PAGE>
which have been filed against any of the Patents or the Applications,
there are no material defects of form in the preparation or filing of
the Applications, the Applications are being diligently prosecuted,
and none of the Applications has been finally rejected or abandoned;
F. The Company is listed in the records of the appropriate
foreign patent offices as the sole assignee of record of each of the
foreign patents listed on Schedule III hereto (herein called the
"Foreign Patents") and each of the foreign applications listed on
Schedule IV hereto (herein called the "Foreign Applications"). To the
best of their knowledge, there are no asserted or unasserted claims of
any persons relating to the scope or ownership of the Foreign Patents
or the Foreign Applications, there are no liens which have been filed
against any of the Foreign Patents or the Foreign Applications, there
are no material defects of form in the preparation or filing of the
Foreign Applications, the Foreign Applications are being diligently
prosecuted, and none of the Foreign Applications has been finally
rejected or abandoned;
G. Nothing has come to their attention that leads them to
believe that the Applications and the Foreign Applications will not
eventuate in issued patents, or that any patents issued in respect of
any such Applications or Foreign Applications will not be valid or
will not afford the Company reasonable patent protection relative to
the subject matter thereof;
H. The Company is the non-exclusive licensee of the United
States and foreign patents and patent applications listed on Schedule
V and is the exclusive licensee of the United States and foreign
patents and patent applications listed on Schedule VI. All such
licenses are duly executed, validly binding and enforceable in
accordance with their terms and, to the best of their knowledge, the
Company is not in default (declared or undeclared) of any material
provision of any such licenses;
I. To the best of their knowledge, all pertinent prior art
references known to the Company or its counsel during the prosecution
of the Patents and the Applications were disclosed to the PTO and, to
the best of their knowledge, neither such counsel nor the Company made
any misrepresentation to, or concealed any material fact from, the PTO
during such prosecution;
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<PAGE>
J. To the best of their knowledge, the Company takes security
measures adequate to assert trade secret protection in its non-
patented technology;
K. The agreements executed by the Company's employees,
consultants and other advisors respecting trade secrets,
confidentiality, or intellectual property rights are valid, binding
and enforceable in accordance with their express terms; and
L. Nothing has come to their attention that leads them to
believe that, with respect to licenses, patents, trade secrets,
copyrights or other proprietary information or know-how owned or used
by the Company which are the subject of the foregoing opinions, the
Registration Statement, at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date (unless
the term "Prospectus" refers to a prospectus which has been provided
to the Underwriters by the Company for use in connection with the
offering of the Securities which differs from the Prospectus on file
at the Commission at the time the Registration Statement becomes
effective, in which case at the time it is first provided to the
Underwriters for such use) or at the Closing Date or the Option
Closing Date, as the case may be, included or includes an untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(iii) The favorable opinion, dated as of the Closing Date,
of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters with
respect to the issuance and sale of the Securities, the Registration
Statement and the Prospectus and such other related matters as the
Underwriters shall reasonably request.
(iv) In giving their opinions required by subsections
(b)(i) and (b)(iii), respectively, of this Section 8, Wilson Sonsini
Goodrich & Rosati and Skadden, Arps, Slate, Meagher & Flom shall each
additionally state that nothing has come to their attention that leads them
to believe that the Registration Statement (except for financial statements
and schedules and other financial information included therein, as to which
counsel need make no statement), at the time it became effective, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not
26
<PAGE>
misleading or that the Prospectus (except for financial statements and
schedules and other financial information included therein, as to which
counsel need make no statement), as of its date (unless the term
"Prospectus" refers to a prospectus which has been provided to the
Underwriters by the Company for use in connection with the offering of the
Securities which differs from the Prospectus on file at the Commission at
the time the Registration Statement becomes effective, in which case at the
time it is first provided to the Underwriters for such use) or at the
Closing Date or the Option Closing Date, as the case may be, included or
includes an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
c. (i) There shall not have been, since the date hereof or since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company, whether or not arising in the ordinary course of
business, (ii) the representations and warranties of the Company in Section 6
hereof shall be true and correct with the same force and effect as though
expressly made at and as of the Closing Date, except to the extent that any such
representation or warranty relates to a specific date, (iii) the Company shall
have complied in all material respects with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Date, (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or threatened by the Commission and (v) the Representatives shall have
received a certificate, dated the Closing Date and signed by the President or
any Vice President and the chief financial or accounting officer of the Company
to the effect set forth in clauses (i), (ii), (iii) and (iv) above.
d. At the time of the execution of this Agreement, the
Underwriters shall have received from Price Waterhouse LLP a letter dated such
date, in form and substance satisfactory to the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
e. The Underwriters shall have received from Price Waterhouse
LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of this
Section, except that
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<PAGE>
in the specified date referred to shall be a date not more than three business
days prior to the Closing Date.
f. The Securities shall have been approved for quotation on
NASDAQ.
g. In the event that the Underwriters exercise their option
provided in Section 2 hereof to purchase all or any portion of the Option
Securities, the representations and warranties of the Company contained herein
and the statements in any certificates furnished by the Company hereunder shall
be true and correct as of the Option Closing Date and, at the relevant Option
Closing Date, the Underwriters shall have received:
(1) A certificate, dated such Option Closing Date, of
the President or any Vice President of the Company and of the chief
financial or accounting officer of the Company confirming that the
certificate delivered at the Closing Date pursuant to Section 8 (c) hereof
remains true and correct as of such Option Closing Date.
(2) The favorable opinion of Wilson Sonsini Goodrich &
Rosati, in form and substance satisfactory to counsel for the Underwriters,
dated such Option Closing Date, relating to the Option Securities to be
purchased on such Option Closing Date and otherwise to the same effect as
the opinion required by Sections 8 (b)(i) and 8 (b)(iv) hereof.
(3) The favorable opinion of _______________, in form
and substance satisfactory to counsel for the Underwriters, dated such
Option Closing Date to the same effect as the opinion required by Section
8(b)(ii) hereof.
(4) The favorable opinion of Skadden, Arps, Slate,
Meagher & Flom, counsel for the Underwriters, dated such Option Closing
Date, relating to the Option Securities to be purchased on such Option
Closing Date and otherwise to the same effect as the opinion required by
Sections 8 (b)(iii) and 8 (b)(iv) hereof.
(5) A letter from Price Waterhouse LLP in form and
substance satisfactory to the Underwriters and dated such Option Closing
Date, substantially the same in form and substance as the letter furnished
to the Underwriters pursuant to Section 8(e) hereof, except that the
"specified date" in the letter furnished pursuant to this Section 8(g)(6)
shall be a date not more than three business days prior to such Option
Closing Date.
h. At the date of this Agreement, the Underwriters shall have
received lock-up agreements in form and substance
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<PAGE>
satisfactory to the Underwriters by the persons listed on Schedule B hereto.
i. Counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties or the fulfillment of any of the conditions herein
contained; and all proceedings taken by the Company in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Underwriters and counsel for the Underwriters.
j. The NASD shall not have raised any objection with respect to
the fairness and reasonableness of the underwriting terms and arrangements.
k. Any certificate or document signed by any officer of the
Company and delivered to you, as Representatives of the Underwriters, or to
counsel for the Underwriters, shall be deemed a representation and warranty by
the Company to each Underwriter as to the statements made therein.
l. If any condition specified in this Section 8 shall not have
been fulfilled when and as required to be fulfilled, this Agreement, or, in the
case of any condition to the purchase of Option Securities, on an Option Closing
Date which is after the Closing Date, the obligations of the several
Underwriters to purchase the relevant Option Securities, may be terminated by
the Representatives by notice to the Company at any time at or prior to Closing
Date or such an Option Closing Date as the case may be, and such termination
shall be without liability of any party to any other party except as provided in
Section 9 and except that Sections 6 and 7 shall survive any such termination
and remain in full force and effect.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each preliminary prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight and charges for
counting and packaging) of such copies of the Registration Statement, each
preliminary prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Securities; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Securities, including any stamp
taxes in connection with the original issuance and sale of the Securities; (iv)
the printing (or reproduction) and delivery of this Agreement, the preliminary
and supplemental Blue Sky Memoranda and all other agreements or documents
printed (or
29
<PAGE>
reproduced) and delivered in connection with the original issuance and sale of
the Securities; (v) the quotation of the Securities on NASDAQ; (vi) the
registration or qualification of the Securities for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(g)
hereof (including the reasonable fees, expenses and disbursements of counsel for
the Underwriters relating to the preparation, printing or reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the filing fees and the reasonable fees
and expenses of counsel for the Underwriters incident to securing any required
review by the NASD; and (viii) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and (v)
of Section 11 hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply, in any material respect, with the terms or fulfill, in any material
respect, any of the conditions of this Agreement, the Company agrees to
reimburse the Representatives for all reasonable out-of-pocket expenses
(including reasonable fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Securities
may commence, when notification of the effectiveness of the Registration
Statement or such post-effective amendment has been released by the Commission.
Until such time as this Agreement shall have become effective, it may be
terminated by the Company, by notifying you, or by you, as Representatives of
the several Underwriters, by notifying the Company.
If one or more of the Underwriters shall fail on the Closing Date to
purchase the Initial Securities which it or they are obligated to purchase under
this Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then:
a. if the number of Defaulted Securities does not exceed 10% of
the number of Initial Securities, the non-defaulting Underwriters shall be
obligated to purchase the full amount thereof
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<PAGE>
in the proportions that their respective underwriting obligations hereunder bear
to the underwriting obligations of all non-defaulting Underwriters, or
b. if the number of Defaulted Securities exceeds 10% of the
number of Initial Securities, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone the Closing Date for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. a. The Underwriters may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Date
or Option Closing Date, as the case may be, (i) if there has been, since the
date of this Agreement or since the respective dates as of which information is
given in the Registration Statement, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, whether or not arising in the ordinary course
of business, (ii) if there has occurred any change in the financial markets in
the United States or elsewhere or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which is such as to make it,
in your judgement, impracticable or inadvisable to market the Securities or to
enforce contracts for the sale of the Securities, (iii) if trading in the Common
Stock has been suspended by the Commission, or if trading generally on the
American Stock Exchange, the New York Stock Exchange or in the over-the-counter
markets has been suspended, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities have been required, by such
exchange or markets or by order of the Commission or any other governmental
authority, or if a banking moratorium has been declared by either Federal, New
York or Illinois authorities, (iv) the enactment, publication, decree or other
promulgation of any Federal or state statute, regulation, rule or order of any
court or other governmental authority which in your judgement materially and
adversely affects or may materially or adversely affect the business or
operations of the Company or (v) the taking of any action by any Federal, state
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<PAGE>
or local government or agency in respect of its monetary or fiscal affairs which
in your judgement has a material adverse effect on the securities markets in the
United States, and would in your judgement make it impracticable or inadvisable
to market the Securities or to enforce any contract for the sale thereof.
Notice of such termination may be given by telegram, telecopy or telephone and
shall be subsequently confirmed by letter.
b. If this Agreement is terminated pursuant to this Section 11,
such termination shall be without liability of any party to any other party
except as provided in Section 9 and provided further that Sections 6 and 7 shall
survive such termination and remain in full force and effect.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover page, and the statements under the caption "Underwriting" in
any preliminary prospectus and in the Prospectus constitute the only information
furnished by or on behalf of the Underwriters through you as such information is
referred to in Sections 5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company at the office of the
Company, at 3347 Investment Boulevard, Hayward, California 94545, Attention:
Warren E. Pinckert II, President and Chief Executive Officer; or (ii) if to you,
as Representatives of the several Underwriters, care of Vector Securities
International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield, Illinois 60015,
Attention: Syndicate Department.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois applicable
to contracts made and to be performed within the State of Illinois. This
Agreement may be signed in various counterparts which together constitute one
and the same instrument. If signed in counterparts, this Agreement shall not
become effective unless at least one counterpart hereof shall have been executed
and delivered on behalf of each party hereto.
15. SUCCESSORS. This Agreement has been and is made solely for the
benefit of the several Underwriters, the Company, its directors and officers,
the other persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Securities in his
status as such purchaser.
32
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
CHOLESTECH CORPORATION
By:
-------------------------
President and Chief
Executive Officer
Confirmed as of the date first
above mentioned on behalf of them-
selves and the other several Under-
writers named in Schedule I hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
As Representatives of the
Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By:
------------------------------------
Vice President
33
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SCHEDULE I
CHOLESTECH CORPORATION
Number of Initial
Securities Purchased
Underwriter. . . . . . . . . . . . . . . . . . . . from the Company
- ----------- --------------------
Vector Securities
International, Inc. . . . . . . . . . . . . . . .
Principal Financial
Securities, Inc.. . . . . . . . . . . . . . . . .
Total ------------------------
<PAGE>
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
EXHIBIT 5.1
MAY 9, 1996
Cholestech Corporation
3347 Investment Boulevard
Hayward, California 94545
Attn: Warren E. Pinckert II
President and Chief Executive Officer
Re: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission (the "COMMISSION") on or about
the date hereof (the "REGISTRATION STATEMENT") in connection with the
registration under the Securities Act of 1933, as amended, of 3,450,000
shares of your Common Stock (the "STOCK"), all of which are authorized but
heretofore unissued, 450,000 shares of which may be sold pursuant to an
over-allotment option held by the underwriters. The Stock is to be sold to
the underwriters for resale to the public, as described in the Registration
Statement and pursuant to the Underwriting Agreement filed as an exhibit
thereto. As your counsel in connection with this transaction, we have
examined the proceedings taken and are familiar with the proceedings proposed
to be taken by you in connection with the sale and issuance of the Stock.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Stock, and upon completion of the proceedings being taken in order to
permit such transactions to be carried out in accordance with the securities
laws of the various states where required, the Stock when issued and sold in
the manner referred to in the Registration Statement will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our names wherever appearing in
the Registration Statement, including the Prospectus constituting a part
thereof, and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati P.C.
<PAGE>
EXHIBIT 10.15
CONFIDENTIAL TREATMENT
REQUESTED
METRA BIOSYSTEMS, INC.
DEVELOPMENT, LICENSE AND DISTRIBUTION AGREEMENT
This DEVELOPMENT, LICENSE, AND DISTRIBUTION AGREEMENT (the "AGREEMENT") is
entered into as of the third day of May, 1996 (the "EFFECTIVE DATE") by and
between METRA BIOSYSTEMS, INC., a California corporation having a principal
place of business at 265 North Whisman Road, Mountain View, California 94043
("METRA"), and CHOLESTECH CORPORATION, a California corporation having a
principal place of business at 3347 Investment Blvd., Hayward, CA 94545-3877
("CHOLESTECH"), with reference to the following:
RECITALS
WHEREAS Metra is a biomedical company in the business of developing and
marketing diagnostics, including biochemical markers and reagents, for
connective tissue diseases;
WHEREAS Cholestech is a diagnostics company in the business of developing
and marketing point-of-care diagnostic instruments and reagents; and
WHEREAS the parties wish to develop a point-of-care diagnostic test for the
measurement of bone resorption utilizing Metra's Pyrilinks-Registered
Trademark--D product and the Cholestech L-D-X-Registered Trademark- instrument
platform and cassette format, and to maximize the distribution and market
penetration of such test;
NOW, THEREFORE, in consideration of the mutual covenants and conditions set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
AGREEMENT
SECTION 1: DEFINITIONS AND RULES OF CONSTRUCTION
1.1 DEFINITIONS. For purposes of this Agreement, the following words and
phrases shall have the following meaning:
1.1.1 "AFFILIATE" shall mean, with respect to a party, any person,
corporation or other business entity that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under common control
with, a party. For this purpose, control of a corporation or other business
entity shall mean direct or indirect beneficial ownership of fifty percent (50%)
or more of the voting interest in, or a fifty percent (50%) or greater interest
in the equity of, such corporation or other business entity.
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1.1.2 "CHOLESTECH TECHNOLOGY" shall mean all of Cholestech's existing
or future non-public and proprietary technology, including Cholestech Joint
Inventions (as defined in Section 9.1), for Cholestech's L-D-X-Registered
Trademark- point-of-care diagnostic instruments and reagents as necessary to
develop, manufacture, and commercially exploit the Licensed Product and Future
Licensed Products as set forth in this Agreement, said technology being
discovered or developed by or for Cholestech or licensed to Cholestech which
Cholestech in turn is free to license, including all developments, discoveries,
inventions, techniques, methods, processes, trade secrets, biological materials,
know-how and technical information pertaining thereto, whether or not
patentable, and any improvements or modifications thereto made by Cholestech (to
the extent Cholestech shall have the right to grant such rights) during the Term
of this Agreement.
1.1.3 "COMBINATION PRODUCT" shall mean a Licensed Product or Future
Licensed Products that is sold together in combination with one or more
diagnostic markers outside the scope of this Agreement having significant
independent diagnostic utility.
1.1.4 "FDA" shall mean the United States Food and Drug Administration
or any successor agency thereof.
1.1.5 "FULLY BURDENED MANUFACTURING COST" of Reagents, Licensed
Product, or Future Licensed Products shall mean the cost of [ ]
incurred in the manufacture of such Reagents, Licensed Product, or Future
Licensed Products, respectively, such calculation being based upon accepted
industry standards as determined by U.S. GAAP.
1.1.6 "FUTURE LICENSED PRODUCTS" shall mean immunoassay cassettes that
incorporate Metra Future Products for use with Cholestech's L-D-X-Registered
Trademark- point-of-care instrument and which incorporate any Metra Technology
and Cholestech Technology.
1.1.7 "LICENSED PATENTS" shall mean either Cholestech Patents or Metra
Patents:
1.1.7(a) "CHOLESTECH PATENTS" shall mean all patents and patent
applications, including provisional applications, as to which Cholestech has, as
of the Effective Date or during the Term of this Agreement, the right to grant
the licenses or sublicenses with respect thereto, containing claims covering the
Licensed Product or Future Licensed Products or processes relating thereto, and
all patents and patent applications resulting from Cholestech Joint Inventions,
and which are filed with respect to inventions conceived prior to or during the
Term of this Agreement in the United States or any foreign jurisdiction,
including any continuation, continuation-in-part, division, substitute
application, re-registration, or patent issued therefrom, any reissue, extension
or patent term extension thereof, and any confirmation patent or registration
patent or patent of addition based on any such patent.
1.1.7(b) "METRA PATENTS" shall mean all patents and patent
applications, including provisional applications, as to which Metra has, as of
the Effective Date or during the Term of this Agreement, the right to grant the
licenses or sublicenses with respect thereto, containing claims covering the
Licensed Product or Future Licensed Products or processes
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relating thereto, and all patents and patent applications resulting from Metra
Joint Inventions, and which are filed with respect to inventions conceived prior
to or during the Term of this Agreement in the United States or any foreign
jurisdiction, including any continuation, continuation-in-part, division,
substitute application, re-registration, or patent issued therefrom, any
reissue, extension or patent term extension thereof, and any confirmation patent
or registration patent or patent of addition based on any such patent.
1.1.8 "LICENSED PRODUCT" shall mean an immunoassay cassette for the
measurement of bone resorption, such cassette incorporating Metra's
Pyrilinks-Registered Trademark--D technology for measurement of
deoxypyridinoline in human urine samples, for use with Cholestech's
L-D-X-Registered Trademark- point-of-care instrument, as described in further
detail in the product specifications set forth in EXHIBIT A attached hereto, and
which incorporates any Metra Technology and Cholestech Technology.
1.1.9 "LICENSED PRODUCT PROFITS" shall mean any Net Sales of Licensed
Product or Future Licensed Products, as applicable, minus Cholestech's Fully
Burdened Manufacturing Cost for such Licensed Product or Future Licensed
Products, as applicable, and minus Cholestech's and Metra's [ ]
costs directly associated with the commercialization of such Licensed Product
and Future Licensed Products, as applicable, solely to the extent that such
deductions are expressly approved by the Commercialization Committee set forth
in Section 3.2 hereto.
1.1.10 "METRA FUTURE PRODUCT(S)" shall mean, subject to Section 4.5,
Metra's existing and future connective tissue biochemical markers and Reagents,
exclusive of biochemical markers and Reagents incorporated in Licensed Product,
and that Metra decides to commercialize or have commercialized (to the extent
Metra shall have the right to grant such rights; PROVIDED, HOWEVER, that in the
event that Metra discovers any new biochemical marker ("METRA NEW MARKER") or
obtains a license to a biochemical marker from a third party [ ]
("THIRD PARTY MARKER"), then Metra can [ ] such Metra
New Marker or Third Pary Marker to any third party [ ] with a
third party for such Metra New Marker or Third Pary Marker that [ ]
to such Metra New Marker or Third Pary Marker).
1.1.11 "METRA TECHNOLOGY" shall mean, subject to Section 4.5, all of
Metra's existing or future non-public and proprietary technology, including
Metra Joint Inventions, for the measurement of biochemical markers, and other
connective tissue biochemical markers, said technology being discovered or
developed by or for Metra or licensed to Metra which Metra in turn is free to
license (to the extent Metra shall have the right to grant such rights),
including all developments, discoveries, inventions, techniques, methods,
processes, trade secrets, biological materials, know-how and technical
information pertaining thereto, whether or not patentable, and any improvements
or modifications thereto made by Metra (to the extent Metra shall have the right
to grant such rights) during the term of this Agreement.
1.1.12 "TRADEMARKS" shall mean those trademarks, registered or not, now
owned or licensed, or hereafter acquired or licensed during the term of this
Agreement, by or on behalf of either party or any of such party's Affiliates,
adopted or used in connection with this Agreement,
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including those Trademarks listed in EXHIBIT F attached hereto, which list may
be updated from time to time by the parties hereto.
1.1.13 "NET SALES" shall mean the gross invoiced price for all Licensed
Product or Future Licensed Products sold by Cholestech or its Affiliates, or by
Metra or its Affiliates pursuant to Section 4.4, to unrelated third parties (or
to Affiliates that are end-users of the Licensed Product or Future Licensed
Products), less deductions made in the normal course of business for: (i)
commercially reasonable quantity, trade and cash discounts or rebates, recalls,
credits or allowances and adjustments separately and actually credited to
customers; (ii) charges for freight, postage, transportation, import or export
taxes, excise taxes and other similar taxes, insurance and other delivery costs
not otherwise charged to the customer; and (iii) any tax or other government
charges imposed on the sale or use of Licensed Product or Future Licensed
Products (other than income tax) levied on its sale, transportation or delivery
and borne by Cholestech or its Affiliates or by Metra or its Affiliates, as
applicable and any withholding taxes to the extent that the selling party bears
the withholding tax and cannot claim a credit for such amount; PROVIDED,
HOWEVER, that: (w) the Commercialization Committee, described in Section 3.2
hereto, shall determine the basis for determining Net Sales price with respect
to Combination Products; (x) Net Sales shall not include Licensed Product or
Future Licensed Products used in [ ], or for [ ]
or [ ] or as [ ] so long as Cholestech
receives no compensation in any form for such use/donation; and (y) in the
event that a Licensed Product or any Future Licensed Products is transferred by
Cholestech or its Affiliates or by Metra or its Affiliates, as applicable, to
an end user, except as provided in Section 1.1.13(x) hereto, free of charge or
at a price which is substantially lower than the price that would be charged
in an arms length third party transaction, then the Net Sales of such Licensed
Product or Future Licensed Products shall be determined using the average
selling price of such Licensed Product or Future Licensed Products, as
applicable, by Cholestech or its Affiliates or by Metra or its Affiliates, as
applicable, in arms length third party transactions over the same time period
in which it is given or, if no average selling price of such Licensed Product
is available as of such date, at a reasonable value (to be agreed upon by the
Commercialization Committee) based upon the average selling prices of products
available in the marketplace similar to such Licensed Product or Future
Licensed Products, as applicable.
1.1.14 "NON-METRA PRODUCT" shall mean an immunoassay cassette that does
not incorporate any Metra Technology or Reagents and that incorporates an
immunoassay cassette developed and funded under this Agreement or that is
manufactured using the same or a substantially similar main body tool and
reaction bar tool as those tools developed under this Agreement for
manufacturing the Licensed Product.
1.1.15 "REAGENTS" shall mean chemical and biological materials which use
Metra Technology, and include polyclonal or monoclonal antibodies, antigens, and
conjugates.
1.1.16 "REGULATORY APPROVAL" shall mean the granting of all governmental
or regulatory approvals required, if any, for the sale of a Licensed Product in
a given country or jurisdiction within the Territory, including without
limitation, FDA approval in the United States.
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1.1.17 "TECHNICAL INFORMATION" shall mean all inventions, discoveries,
know-how, trade secrets, information, experience, technical data, formulas,
procedures or results relating to the Licensed Product or Future Licensed
Products (including, without limitation, physical, chemical, biological, pre-
clinical and clinical data, product forms and formulations, and know-how
relating to methods, processes or techniques for the manufacture or use of
Licensed Product or Future Licensed Product including, without limitation,
preparation, recovery, packaging, and sterilization processes and techniques,
control assays and specifications), which are rightfully held by a party hereto
or its Affiliates with right to license or sublicense on the Effective Date, or
which are developed or acquired by such party or its Affiliates with right to
license or sublicense during the term of this Agreement, and which Technical
Information is useful or necessary for the registration, manufacture, use or
sale of Licensed Product or Future Licensed Products.
1.1.18 "TERRITORY" shall mean the entire world.
1.2 RULES OF CONSTRUCTION. As used in this Agreement, all terms used in the
singular shall be deemed to include the plural, and vice versa, as the context
may require. The words "hereof," "herein" and "hereunder" and other words of
similar import refer to this Agreement as a whole, including any exhibits
hereto, as the same may from time to time be amended or supplemented. The word
"including" when used herein is not intended to be exclusive and means
"including, without limitation." The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement. The terms "party" and
"parties" shall refer to Metra and Cholestech, individually or collectively.
This Agreement has been negotiated by the parties hereto and their respective
counsel and shall be fairly interpreted in accordance with its terms and without
any rules of construction relating to which party drafted the Agreement being
applied in favor of or against either party.
SECTION 2: LICENSE GRANT.
2.1 LICENSE FROM METRA TO CHOLESTECH. Metra hereby grants to Cholestech and
its Affiliates: (i) a non-exclusive, royalty-bearing license or sublicense, as
the case may be, without the right to sublicense, under Metra Patents and Metra
Technology to use, make, have made, sell, offer to sell, import or otherwise
distribute Licensed Product within the Territory; and (ii) subject to Section
4.5, a non-exclusive, royalty-bearing license or sublicense, as the case may be,
without the right to sublicense, under Metra Patents and Metra Technology to
use, make, have made, sell, offer to sell, import, or otherwise distribute the
Future Licensed Products; PROVIDED, HOWEVER, that any and all licenses granted
hereunder are subject to the provisions of Section 4, and subject specifically,
without limitation, to Section 4.6.
2.2 SUPPLY AGREEMENT; DEFAULT MANUFACTURING LICENSES. The parties agree that
following execution of this Agreement, but in any event, within three (3) months
hereof, they will negotiate in good faith and will execute a supply agreement
which includes terms of supply of Metra's Reagents and terms of supply of the
Licensed Product and Future Licensed Products under Section 4.4, and which shall
incorporate all of the obligations set forth under Section 8 hereto.
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Such supply agreement shall provide that Reagents, Licensed Product, and Future
Licensed Products shall be supplied by one party to the other party at [ ],
which shall be payable within [ ] days of date of invoice for such
Reagents, Licensed Product, and Future Licensed Products. Any royalties
therefor or [ ] of Licensed Products Profits shall be made according to
the terms of this Agreement.
2.2.1 Metra agrees that Cholestech shall be granted a non-exclusive,
royalty-free license (for the Term of this Agreement) to make, have made,
import, use, offer to sell, sell and otherwise distribute the Reagents if: (i)
Metra is in breach under this Agreement of its payment obligations to Cholestech
(unless such payment obligations are subject of a good faith dispute between the
parties) and fails to cure any such breach within a specified cure period; (ii)
Metra has breached its obligation to [ ]
and fails to cure any such breach within a specified cure period; or
(iii) enters into bankruptcy or liquidation proceedings or becomes insolvent,
all pursuant to the definitive terms of the supply agreement.
2.2.2 Cholestech agrees that Metra shall be granted a non-exclusive
royalty-free license (for the Term of this Agreement) to make, have made,
import, use, offer to sell, sell and otherwise distribute [ ], if
Cholestech: (i) has breached its payment obligations to Metra under this
Agreement (unless such payment obligations are subject of a good faith dispute
between the parties) and fails to cure any such breach within a specified cure
period; (ii) has breached its obligation to supply Licensed Product or Future
Licensed Products to Metra or its Affiliates pursuant to Section 4.4 or to the
agreed upon distributors pursuant to the agreed upon forecasts, and fails to
cure any such breach within a specified cure period; or (iii) enters into
bankruptcy or liquidation proceedings or becomes insolvent, all pursuant to
the definitive terms of the supply agreement. Cholestech further agrees that
Metra shall be granted a non-exclusive license (for the Term of this
Agreement), [ ] to make, have made, import, use, offer to sell,
sell and otherwise distribute Cholestech's [ ], if
Cholestech: (x) has breached its obligation to supply Cholestech's
L-D-X-Registered Trademark- point of care instrument to Metra or its Affiliates
pursuant to Section 4.4 or to the agreed upon distributors pursuant to the
agreed upon forecasts, and fails to cure any such breach within a specified
cure period; or (y) enters into bankruptcy or liquidation proceedings or
becomes insolvent or ceases manufacturing activities, all pursuant to the
definitive terms of the supply agreement. In addition, the supply agreement
shall contain a provision for a pro rata allocation of Licensed Product, Future
Licensed Products, Reagents, and Cholestech's L-D-X-Registered Trademark-
point-of-care instrument from Cholestech to Metra in the event that demand for
such products exceeds currently available supply, as determined by firm
purchase orders, and shall provide that Cholestech may cure any such shortage
within a reasonable cure period by second sourcing or increased internal
manufacturing capacity.
2.3 TRADEMARK LICENSE. Each party hereby grants to the other party hereto a
non-exclusive license under its Trademarks to use such Trademarks solely for
purposes of co-branding the Licensed Product or Future Licensed Products. Each
party shall communicate to the other party its desired appearance and usage of
its Trademarks. Each party shall have the right to review, approve, and request
reasonable modifications of any and all use of its Trademarks by the other
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party prior to such use, which modifications the other party shall use its best
efforts to promptly incorporate or adopt with respect to such Trademarks. Each
party will promptly respond to requests from the other party for review of such
use.
SECTION 3: LICENSED PRODUCT DEVELOPMENT.
3.1 DEVELOPMENT COMMITTEE. Metra and Cholestech shall form a Development
Committee which shall meet monthly or as mutually agreed to discuss progress
toward and any deviations from the development and milestone schedule set forth
in EXHIBIT B and to discuss and agree upon deviations from the product
specifications set forth in EXHIBIT A and resulting deviations from the
milestone schedule set forth in EXHIBIT B. The Development Committee will be
composed of two (2) voting representatives from each of Metra and Cholestech.
All decisions of the Development Committee will require a majority vote of such
committee. A quorum shall not exist for the purpose of a vote of the
Development Committee unless all members thereof are in attendance. In the
event of an even split or an inability of the Development Committee to reach a
decision on any issue, then such issue shall be submitted to the CEOs of both
parties. In the event that the CEOs are unable to reach a decision on such
issue, then the matter shall go to arbitration pursuant to Section 14.6 hereto.
Any decision by the Development Committee shall be binding upon the parties.
3.2 COMMERCIALIZATION COMMITTEE. Metra and Cholestech shall form a
Commercialization Committee which shall meet monthly or as mutually agreed to
determine distribution and promotional parties for the Licensed Product and
Future Licensed Products and to determine forecasting pursuant to Sections 4.4,
8.2 and 8.3, and joint marketing and collaboration activities, and financial
terms for Future Licensed Products. The Commercialization Committee will be
composed of two (2) voting representatives from each of Metra and Cholestech.
All decisions of the Commercialization Committee will require a majority vote of
such committee. A quorum shall not exist for the purpose of a vote of the
Commercialization Committee unless all members thereof are in attendance. In
the event of an even split or an inability of the Commercialization Committee to
reach a decision on any issue, then such issue shall be submitted to the CEOs of
both parties. In the event that the CEOs are unable to reach a decision on such
issue, then the matter shall go to arbitration pursuant to Section 14.6 hereto;
PROVIDED, HOWEVER, that in the event that the CEO's cannot decide on a
distribution party for a Licensed Product or Future Licensed Products pursuant
to Section 4.1 hereto, then each party shall have the right to co-distribute
such Licensed Product and such Future Licensed Products pursuant to Section 4.4
hereto. Any decision by the Commercialization Committee shall be binding upon
the parties. Commercialization Committee shall review marketing and promotional
literature including labeling for any Licensed Product and Future Licensed
Products for compliance with the rules and regulations promulgated by a
regulatory authority of competent jurisdiction, including FDA and the Securities
Exchange Commission.
3.3 COSTS. Each party shall pay its own travel and lodging expenses incurred
in connection with the meetings of both the Development Committee described in
Section 3.1 and the Commercialization Committee described in Section 3.2, which
meetings shall alternate between locations so as to balance travel requirements
and expenses. Each party shall use reasonable
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efforts to cause its respective representatives to attend all meetings of both
the Development Committee and the Commercialization Committee.
3.4 EXCHANGE OF TECHNICAL INFORMATION. During the Term of this Agreement,
Metra and Cholestech shall inform each other, to the extent they have not
already done so, of their respective Technical Information which is necessary or
useful for the other party to carry out its obligations under this Agreement to
develop, manufacture, register, market and sell Licensed Product and Future
Licensed Products. During the term of this Agreement, each party will permit
access at reasonable times and with reasonable frequency to the relevant
scientific, manufacturing, preclinical, clinical, regulatory and other
appropriate personnel of the other party and its Affiliates. Each party shall
inform the other through the Development Committee or Commercialization
Committee, as appropriate, on a timely basis of their respective Technical
Information (including all preclinical and clinical results relating to the
Licensed Product or Future Licensed Products) obtained by them to the extent
such results are necessary or useful for the other party to carry out its
obligations under this Agreement to develop, manufacture, register, market and
sell Licensed Product or Future Licensed Products.
3.5 COORDINATION OF CLINICAL TRIALS AND SUBMISSIONS. Cholestech shall assume
primary responsibility for the clinical development program for the Licensed
Product and Future Licensed Products, including all clinical trials and
submissions as may be required to obtain any Regulatory Approval or waive status
under the Clinical Laboratory Improvement Amendments of 1988 (CLIA). Cholestech
shall prepare an annual clinical trial plan for the Licensed Product and Future
Licensed Products, taking into consideration the suggestions of the person or
persons appointed by Metra to supervise the clinical development of such
Licensed Product and Future Licensed Products, and subject to the approval of
the Development Committee and Commercialization Committee. Cholestech shall pay
any and all costs and expenses associated with such clinical trials, FDA, and
CLIA submissions, and shall allow Metra to review and provide input into such
trials and submissions, in connection with the Licensed Products and Future
Licensed Products. Cholestech shall be responsible for and shall pay any and
all costs and expenses associated with all FDA Good Manufacturing Practice
("GMP") obligations in connection with the Licensed Products and Future Licensed
Products, PROVIDED, HOWEVER, that Metra has responsibility for any GMP
obligations in connection with the Reagents. Metra shall provide to Cholestech
access to its 510(k) and/or PMA submissions, [ ] and any [ ]
(the "SUBMISSIONS MATERIALS") to the extent necessary to facilitate Cholestech's
FDA or other applicable regulatory body submission for the Licensed Product and
Future Licensed Products.
3.6 REAGENTS. During the Term of this Agreement, Metra shall supply Reagents
to Cholestech at a price equal to Metra's [ ]
subject to the provisions of Section 13.3 hereto.
3.7 PERMITTED USE OF INFORMATION AND ASSISTANCE. Cholestech and Metra each
shall be entitled to use the information and assistance furnished by the other
party pursuant to this Section 3 solely for purposes of: (i) achieving Licensed
Product and Future Licensed Products quality and/or quantity requirements;
and/or (ii) as necessary to fulfill the obligations set forth in this
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Agreement, without incurring any additional royalty or other payment obligation.
All such information and assistance shall be deemed Confidential Information as
defined in Section 12.1 hereto.
3.8 COVENANTS. Cholestech shall use its commercially reasonable efforts,
consistent with its reasonable business judgment and consistent with those
applied to other products of similar commercial value, to develop Licensed
Product and Future Licensed Products and to commence commercial marketing of
Licensed Product and Future Licensed Products within the Territory in countries
in which Cholestech normally markets diagnostic products after obtaining
necessary government approvals in such countries.
SECTION 4: DISTRIBUTION
4.1 INTERNATIONAL DISTRIBUTION. Subject to the provisions of Section 4.6
below, outside of the United States, Cholestech and Metra agree that both
parties will use reasonable commercial efforts to jointly agree upon
distribution and promotional party(ies) for the Licensed Product and Future
Licensed Products.
4.2 UNITED STATES DISTRIBUTION. In the United States, Cholestech shall be free
to appoint any nonexclusive distribution and promotional party for the Licensed
Product and Future Licensed Products. In the event Metra desires to appoint an
additional nonexclusive distribution party for the Licensed Product and Future
Licensed Products in addition to the party(ies) appointed by Cholestech, Metra
may so appoint the additional [ ] distribution party
without Cholestech's prior written consent: [ ]
In the event Cholestech desires to appoint an exclusive or semi-exclusive
distribution and/or promotional party for the Licensed Products and Future
Licensed Products with respect to any geographic region or class of customers
within an identified market segment, Cholestech shall submit the proposed
exclusive distribution party to the Commercialization Committee for approval.
For purposes of this Agreement, the term "SEMI-EXCLUSIVE" shall mean only two.
4.3 LICENSED PRODUCTS PROFITS. Except in the circumstance contemplated under
Section 4.4 hereto, the parties will [ ] Licensed Product
Profits for Licensed Product and [ ] received
from distribution parties and promotional parties for the Licensed Product;
PROVIDED, HOWEVER, in the event that any and all outstanding balances due on
loans granted from Metra to Cholestech under Section 6 hereto have not been
fully repaid to Metra, then: (i) any and all [ ] received by
Cholestech from distribution or promotional parties for such Licensed Product
shall be paid to Metra and first be applied to any outstanding interest and
thereafter to any outstanding principal of such outstanding loan balance; and,
(ii) Licensed Product Profits shall be paid in accordance with
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Section 6.3(b). The Commercialization Committee shall agree to the distribution
of Licensed Product Profits for Future Licensed Products.
4.4 [ ]. In the event that both the Commercialization Committee
and the CEO's cannot agree upon a distribution party in accordance with the
provisions of Section 3.2 hereto for any [ ] outside of the
[ ], and to assure that the Licensed Product and Future Licensed
Products are distributed to a broad market in an efficient manner, then [ ]
parties will have [ ] for the Licensed Product and Future
Licensed Products in such [ ], subject to the royalty terms and
conditions set forth in Sections 5.1 and 5.2 hereto. It is not the intention of
the parties to have [ ], but solely in the event that the parties,
using their good faith efforts cannot reach agreement on [ ]
of Licensed Products or Future Licensed Products.
4.5 FUTURE LICENSED PRODUCTS. Solely in the event that: (i) the Licensed
Product, as set forth in EXHIBIT A hereto, has received [ ];
and (ii) the parties, by the Commercialization Committee and acting reasonably
and in good faith, agree on the [ ] for the Licensed
Product in each of the [ ] Cholestech will have a
non-exclusive right to Metra Future Products to make, have made, import, use,
and sell Future Licensed Products, as set forth in Section 2.1. Cholestech will
bear all costs and expenses associated with formatting Metra Future Product to
run on Cholestech's L-D-X-Registered Trademark- point-of-care instrument;
PROVIDED, HOWEVER, that Cholestech is not prohibited from obtaining third party
financing so long as Metra's Confidential Information is not disclosed to any
such third party without Metra's prior written approval. Prior to any sale of a
Future Licensed Products by Cholestech, the Commercialization Committee shall
determine and set any profit split or royalty payments on the sale of such
Future Licensed Products; PROVIDED, HOWEVER, that any such profit or royalty
payments shall not exceed the amounts paid by the parties under Sections 4.3 and
5.1. In addition, in the event that Metra is obligated to pay royalties,
license, milestone, or other fees to any third party with respect to Metra
Future Product, then the Commercialization Committee shall determine and set the
allocation of such royalties, license, milestone or other such fees.
4.6 [ ]. In the event that either party distributes any Licensed Product
or Future Licensed Products in the territory of [ ], the parties hereto
acknowledge and agree that Metra has the sole right to select and appoint the
distributor and promotional party for such Licensed Product and Future Licensed
Products.
4.7 NON-COMPETE OBLIGATIONS. Subject to the limitations of this Section 4.7,
Cholestech shall not market or distribute any biochemical marker that is
competitive with the Licensed Product or any Metra Future Product; PROVIDED,
HOWEVER, that the foregoing obligation shall terminate upon the earlier to occur
of: (i) Metra enters into a development, supply and/or license agreement with a
third party [ ]; or
(ii) in the case of a third party to whom Metra has granted rights to more than
one product platform, including point-of-care, when such party [ ].
For purposes
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of this Section 4.7, two markers are deemed to be competitive only if they
compete for the same intended use. As an example, a marker to measure bone
resorption does not compete with a marker to measure bone formation, even though
the two markers both measure an aspect of bone metabolism. If Cholestech
desires to market or distribute its own marker or a third party marker that does
not compete with an existing Metra Future Product, then Cholestech shall first
consult with Metra for a period of twenty-one (21) days regarding whether Metra
has a competing marker in development which will be available to Cholestech
under the terms of this Agreement. If Metra does not have such a competing
marker in development, [ ] then
Cholestech shall be free to market and its own or third party marker. In
addition, the obligations of this Section 4.7 shall not apply to any Metra
Future Products that are not covered by a patent that is either owned by or
licensed to Metra. Metra shall keep Cholestech informed at all times regarding
its existing and future Metra Future Products. The obligations of this Section
4.7 shall terminate in the event that Cholestech loses the right to obtain Metra
Future Products because the parties fail to agree on a [ ]
for one of the [ ] named in Section 4.5.
SECTION 5: ROYALTY PAYMENTS; REPORTS.
5.1 ROYALTY ON DISTRIBUTION OF LICENSED PRODUCT. In the event that the
Commercialization Committee cannot agree in accordance with the provisions of
Section 3.2 hereto regarding a distribution and promotion party for Licensed
Products in any country outside the United States then, as contemplated under
Section 4.4 hereto, each party hereto shall have the right to appoint its own
distribution and promotion party(ies) in such country, subject to payment of the
following royalties:
(i) In the event that Licensed Product are distributed by Metra, Metra
will pay to Cholestech a royalty in the amount of [ ] on the
[ ]; and
(ii) In the event that Licensed Product are distributed by Cholestech,
Cholestech will pay to Metra a royalty in the amount of [ ]
on the [ ].
5.2 CHOLESTECH DISTRIBUTED NON-METRA PRODUCT. In the event that a Non-Metra
Product is distributed by Cholestech, and in the event that Cholestech does not
exercise either Loan (as defined in Section 6.3 hereto) at Milestone 4 or 5 of
the development of Licensed Product, as set forth in EXHIBIT D, then Cholestech
will pay to Metra a royalty in the amount of [ ] on
Net Sales of Non-Metra Product until the Licensed Product is released
commercially, at which time Cholestech will pay to Metra such royalty in the
amount of [ ] on Net Sales of Non-Metra Product; PROVIDED, HOWEVER,
that in the event that there is a delay in the commercial release of Licensed
Product [ ]
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[ ] as set forth in this
Section 5.2. In the event that a Non-Metra Product is distributed by
Cholestech, and in the event that Cholestech does exercise either Loan
(as defined in Section 6.3 hereto) at Milestone 4 or 5 of the development
of Licensed Product, as set forth in EXHIBIT D, then the royalty payments
shall be paid by Cholestech to Metra in accordance with Sections 6.3(e),
(f), (g), or (h), as applicable. In any event, Cholestech's obligation to
pay a royalty to Metra on the sale and distribution of a Non-Metra Product
shall expire [ ] from the date of [ ] of such Non-Metra
Product.
5.3 ROYALTY PAYMENTS. Royalties shall be calculated on a quarterly basis and
shall be paid no later than forty-five (45) days after the end of each calendar
quarter.
5.4 REPORTS. Each of Cholestech and Metra shall furnish to the other party a
written report which includes: (i) the Licensed Product and Future Licensed
Products sold; (ii) the identity of the countries in which sales have been made;
(iii) the Net Sales of each Licensed Product and Future Licensed Products; and
(iv) the financial information relevant to the calculation of royalties,
including the prevailing royalty rate(s) used to calculate such royalties. Such
reports shall be due no later than forty-five (45) days after the end of each
quarter, together with any royalties then due. Such reports shall be made
whether or not either party has engaged in any sales hereunder during said
quarter and shall commence upon commercial release of the first product
hereunder. All information provided by the parties under this Section 5.4 shall
be Confidential Information; PROVIDED, HOWEVER, that Metra may disclose such
information to the Rowett Research Institute to the extent required by the terms
of Metra's License Agreement with the Rowett Research Institute dated April 30,
1990, PROVIDED, FURTHER, that Rowett agrees in writing to keep such information
disclosed to it confidential and not to use such information in any way to the
detriment of Cholestech.
5.5 RECORDS AND AUDIT. Cholestech shall keep full, complete and proper records
and accounts of Net Sales and Fully Burdened Manufacturing Costs of each
Licensed Product and Future Licensed Products in sufficient detail to enable the
royalties and Licensed Products Profits payable to Metra to be determined, and
Metra shall keep full, complete and proper records and accounts of Net Sales and
Fully Burdened Manufacturing Costs of each Reagents and, as applicable, Licensed
Product and Future Licensed Products. Upon reasonable notice to the audited
party, each party shall have the right to have an independent certified public
accountant, selected by the auditing party and acceptable to the audited party,
audit the audited party's and such audited party's Affiliates' records
pertaining to Licensed Product, Future Licensed Products, and Reagents, as
applicable, during normal business hours to verify the royalties payable, Net
Sales, and Fully Burdened Manufacturing Costs of each Licensed Product and
Future Licensed Products pursuant to this Agreement; PROVIDED, HOWEVER, that
such audit: (i) shall not take place more frequently than once a year; and (ii)
shall not cover such records for more than the preceding three (3) years. Such
audit shall be at the expense of the auditing party unless the audited party has
paid to the auditing party less than ninety-five percent (95%) of the amount
determined to be due for a given time period, in which case such audit shall be
at audited party's expense. Each party hereto shall (and require its Affiliates
to) preserve and maintain all such records and accounts required for audit for a
period of three (3) years after the quarter to which
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such records and accounts apply. In any event, the auditor shall only disclose
to the auditing party the results of such audit and none of the data upon which
such audit results are based, which audit results shall be treated by the
auditor and the auditing party as Confidential Information subject to the
provisions of this Agreement.
SECTION 6: EQUITY INVESTMENT; LOANS.
6.1 EQUITY INVESTMENT FUNDING. Metra will fund Cholestech's development of the
Licensed Product by investing in common stock of Cholestech in accordance with
the Investment Schedule set forth in EXHIBIT D attached hereto. Equity
investments will be made by Metra upon the completion of each Milestone, as set
forth in EXHIBIT D, upon the mutual agreement of both parties that such
Milestone has successfully been completed, acting reasonably and in good faith.
The Milestones set forth in EXHIBIT D do not necessarily need to be performed in
the recited order; PROVIDED, HOWEVER, that the first Milestone must be performed
before any other Milestone. In addition, Cholestech hereby grants to Metra
registration rights as set forth in EXHIBIT E hereto, and the parties shall
execute a Registration Rights Agreement substantially in the form of
Registration Rights Agreement attached hereto as EXHIBIT E.
6.2 NO OBLIGATION. Cholestech is under no obligation to accept any loan amount
associated with either of Milestone 4 or Milestone 5, as set forth in EXHIBIT D.
6.3 LOAN CONDITIONS: LICENSED PRODUCTS. In the event that Cholestech
exercises its option to the loan at either of Milestone 4 or Milestone 5 (the
"LOAN"), as set forth in EXHIBIT D attached hereto, each such Loan will be
subject to the following provisions:
(a) The annual interest rate for each such Loan shall be at the [ ]
at the time of each such Loan, as published in the Wall Street Journal on the
date of each such loan;
(b) The Licensed Product Profits for Licensed Product will be divided
between Metra and Cholestech according to the following: [ ] of
such Licensed Product Profits shall be paid to Cholestech, and [ ]
of such Licensed Product Profits shall be paid to Metra, [ ] of
such [ ] to be credited toward any outstanding Loan amount owed
by Cholestech.(1) Upon payment in full of all Loan balances, the parties shall
[ ] Licensed Product Profits, as set forth in Section 4.3 hereto;
(c) Any and all outstanding Loan balance will be due and payable in full
the sooner of: (i) [ ] from the date the Licensed Product is first
made [ ]; or (ii) upon termination of this Agreement by
Metra for breach by Cholestech, according to the Schedule set forth in
Section 6.3(d);
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(1)By way of example, but not limitation, if profits from the sale of Licensed
Product equals [ ], then [ ] is paid to Cholestech, and [ ] is paid to
Metra, and out of Metra's [ ], Metra will credit [ ] toward any outstanding
loan balance.
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(d) If the Development Committee determines or the parties mutually agree
that the Licensed Product cannot be released commercially that would meet the
then-existing product specifications, then all Loan amounts will be repaid to
Metra by Cholestech in [ ] installments over the period of [ ]
extending from the date of such determination;
(e) For so long as there is any outstanding Loan balance, whether or not
the Licensed Product has been commercially released (except as set forth in
Section 6.3(f) hereto), Cholestech will pay to Metra a royalty in the amount of
[ ] on Net Sales of Non-Metra Product;
(f) For so long as there is any outstanding Loan balance, and in the event
that there is a delay in the commercial release of Licensed Product [ ]
then Cholestech will pay to Metra a royalty in the amount of [ ]
on Net Sales of Non-Metra Product until such time as: (i) [ ]
and the Licensed Product is [ ], at which time Cholestech
shall pay to Metra such royalty as set forth in Section 6.3(e) hereto; or (i)
such Loan has fully been repaid by Cholestech, at which time Cholestech shall
pay to Metra such royalty as set forth in Section 6.3(g) hereto;
(g) In the event that Cholestech repaid all outstanding Loan balances to
Metra, and whether or not the Licensed Product has commercially been released
(except as set forth in Section 6.3(h) hereto), then Cholestech will pay to
Metra a royalty in the amount of [ ] on Net Sales of such Non-Metra
Product;
(h) In the event that Cholestech repaid all outstanding Loan balances to
Metra, and in the event that there is a delay in the commercial release of
Licensed Product [ ] then Cholestech will pay
to Metra a royalty in the amount of [ ] on Net Sales
of Non-Metra Product [ ] and the Licensed Product is
[ ] at which time Cholestech shall pay to Metra the royalty as
set forth in Section 6.3(g); and
(i) At any time during the Term of this Agreement, Cholestech shall have
the right to repay the entire outstanding loan balance without penalty.
SECTION 7: GOVERNMENT APPROVALS
7.1 NOTICE OF FDA APPROVALS. Metra shall promptly provide Cholestech with
notice of FDA and corresponding foreign regulatory approvals received by Metra
regarding Licensed Product and Future Licensed Products.
7.2 APPROVALS. Cholestech shall solely be responsible for obtaining all
necessary governmental approvals, including FDA approvals, for the development,
testing, production, distribution, sale and use of Licensed Product, Future
Licensed Products, and Non-Metra Product. Metra agrees to provide Cholestech,
at Cholestech's expense, (except for the value of any time expended by existing
Metra employees) with any assistance reasonably requested by
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Cholestech, in obtaining such governmental approvals, including, without
limitation, the furnishing of all relevant technical information and know-how
presently or hereafter available to Metra, but excluding any documentation or
data which Metra is bound by obligations to third parties to keep confidential.
7.3 ASSISTANCE WITH REGULATORY APPROVALS. Metra shall provide Cholestech with
any reasonable assistance that any governmental regulatory body, such as the FDA
or the equivalent, deems necessary or appropriate for Cholestech to secure
regulatory approvals and/or make regulatory submissions in any country with
respect to disclosures made regarding Reagents, including but not limited to FDA
approvals and submissions.
SECTION 8: MANUFACTURING
8.1 MANUFACTURING/GMP DOCUMENTATION. To assure the performance of each party's
obligations under the default manufacturing provisions to be included in the
supply agreement (as contemplated by Section 2.2), Cholestech shall keep its
Cholestech Technology (including, but not limited to all relevant
manufacturing/GMP documentation) and Metra shall keep its Metra Technology
(including, but not limited to all relevant manufacturing/GMP documentation),
on-site at the respective company's headquarters and at a location and/or with a
person identified to the other party hereto from time to time.
8.2 CHOLESTECH OBLIGATIONS. In addition to the responsibilities and
obligations otherwise set forth in this Agreement, Cholestech shall: (i)
provide any and all necessary funding to scale-up and validate a manufacturing
line capable of producing at least [ ] of Licensed
Product [ ] suitable for commercial sale; (ii) supply to Metra Licensed
Product in such amounts as Metra may require; PROVIDED, HOWEVER, that Metra or
the Commercialization Committee provides Cholestech with a [ ]
rolling forecast prepared in good faith setting forth such Licensed Products and
Future Licensed Products requirements on a [ ] basis for [ ], which
forecasts shall be updated; PROVIDED, HOWEVER, that any increase in such
forecast within a [ ] window of receipt by Cholestech cannot be made
without Cholestech's prior written consent; and (iii) identify the Reagents
included in such Licensed Product and Future Licensed Products (including all
packaging, marketing, and promotional materials therefor) by the appropriate
Trademarks, as shall be reasonably directed by Metra. A material failure to
perform the obligations set forth in this Section 8.2 shall constitute a
material breach of this Agreement.
8.3 METRA OBLIGATIONS. In addition to the responsibilities and obligations
otherwise set forth in this Agreement, Metra agrees to supply to Cholestech
Reagents that Cholestech requires solely for purposes of exercising its rights
to develop, manufacture and distribute the Licensed Product and Future Licensed
Products pursuant to the terms of this Agreement; PROVIDED, HOWEVER, that the
Commercialization Committee or Cholestech provides Metra with a [ ]
rolling forecast prepared in good faith setting forth such Reagents requirements
on a [ ] basis for such [ ], which forecasts shall be updated;
PROVIDED, HOWEVER, that any increase in such forecast within a [ ]
window of receipt by Metra cannot be made without Metra's
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prior written consent. A material failure to perform the obligations set forth
in this Section 8.3 shall constitute a material breach of this Agreement.
SECTION 9: OWNERSHIP
9.1 JOINT INVENTIONS. The parties agree that all inventions, discoveries, and
improvements, whether or not patentable, jointly made or conceived by employees
or others acting on behalf of both Metra and Cholestech during the Term of this
Agreement and relating to Reagents or Metra Technology, collectively the "METRA
JOINT INVENTIONS", shall be owned by Metra. The parties further agree that all
inventions, discoveries, and improvements, whether or not patentable, jointly
made or conceived by employees or others acting on behalf of both Metra and
Cholestech during the Term of this Agreement and relating to Cholestech's
L-D-X-Registered Trademark- point-of-care instrument, an immunoassay cassette
for use in Cholestech's L-D-X-Registered Trademark- point-of-care instrument, or
Cholestech Technology, collectively the "CHOLESTECH JOINT INVENTIONS", shall be
owned by Cholestech. Any invention, discovery, and improvement whether or not
patentable, jointly made or conceived by employees or others acting on behalf of
both Metra and Cholestech during the Term of this Agreement and relating neither
to Reagents, Cholestech's L-D-X-Registered Trademark- point-of-care instrument,
an immunoassay cassette for use in Cholestech's L-D-X-Registered Trademark-
point-of-care instrument, Cholestech Technology or Metra Technology,
collectively "JOINT INVENTIONS", shall be jointly owned by both parties hereto
and each party has the right to exploit and sublicense such Joint Inventions
without any duty to account to the other party for profits derived therefrom,
and the Development Committee shall determine which party shall be responsible
for prosecution and maintenance, and costs and expenses related thereto, of any
patent application and patent relating to such Joint Inventions. Each party
hereto shall promptly disclose to the other party hereto the making, conception
or reduction to practice of any such Metra Joint Invention or Cholestech Joint
Invention. Each party shall apply for any patent(s) covering its own joint
invention, as defined in this Section 9.1, and shall be responsible for any and
all costs associated with prosecuting and maintaining such patents; PROVIDED,
HOWEVER, that if a party fails to prosecute or maintain any such patent (the
"FIRST PARTY") within sixty (60) days of request in writing by the other party
hereto (the "SECOND PARTY"), such Second Party shall have the right to prosecute
and maintain such patent at its own expense and shall be solely entitled to
ownership of the issuing or issued patent, and such First Party shall have,
during the Term of this Agreement, a non-exclusive, royalty-free license to
make, have made, use, sell, and import under such patent, and after the
termination or exipration of this Agreement, such First Party shall then have a
non-exclusive license to make, have made, use, sell, and import under such
patent, under commercially reasonable royalty terms.
9.2 INVENTIONS. In the event that Cholestech solely invents or discovers any
improvement(s) or modification(s) solely applicable to: (i) Metra Technology,
then ownership therein shall be solely in Metra; or (ii) Cholestech Technology,
then ownership therein shall be solely in Cholestech. In the event that Metra
solely invents or discovers any improvement(s) or modification(s) solely
applicable to: (x) Cholestech Technology, then ownership therein shall be
solely in Cholestech; or (y) Metra Technology, then ownership therein shall be
solely in Metra. Each party shall fully cooperate in assuring that all rights
in and to such inventions and discoveries are fully vested in the other party in
accordance with this Section 9.2. Each party
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shall promptly notify the other party of any such inventions or discoveries set
forth in this Section 9.2.
SECTION 10: REPRESENTATIONS AND WARRANTIES
10.1 BY CHOLESTECH. Cholestech hereby represents and warrants to Metra that:
(i) Cholestech has the right to enter into and perform its obligations under
this Agreement and that to the best of Cholestech's knowledge and belief the
execution, delivery and performance of this Agreement does not conflict with,
violate, or breach any agreement to which Cholestech is a party, or with
Cholestech's Articles of Incorporation or Bylaws; (ii) to the best of
Cholestech's knowledge and belief, the execution, delivery, and performance of
this Agreement does not conflict with, violate, or breach any agreement filed by
Cholestech as a "material contract" pursuant to Item 601(b)(10) of Regulation S-
K under The Securities Act of 1933, as amended, or with Cholestech's Articles of
Incorporation or Bylaws; (iii) to the best of its knowledge and belief as of the
Effective Date of this Agreement, the manufacture, use, sale, offer to sell or
importing of Licensed Product and Future Licensed Products based on the
Cholestech Technology in the Territory does not infringe or violate any patent,
trademark, or copyright or any other intellectual property or proprietary rights
of any third party, and during the Term of this Agreement Cholestech shall
discuss and report to the Development Committee any knowledge or belief that the
manufacture, use, sale, offer to sell, or importing of the Licensed Product or
Future Licensed Products based on the Cholestech Technology in the Territory
infringes or violates any patent, trademark, or copyright or any other
intellectual property or proprietary rights of any third party; (iv) to the best
of Cholestech's knowledge and belief as of the Effective Date of this Agreement,
there are no pending actions, either actual or threatened, relating to
Cholestech Technology or Cholestech Patents; and (v) the Cholestech Patents
and/or Cholestech Technology have not knowingly been obtained through any
activity, omission or representation that would limit or destroy the validity of
the Cholestech Patents and/or Cholestech Technology and Cholestech has no
knowledge or information that would materially impact the validity and/or
enforceability of the existing Cholestech Patents and/or Cholestech Technology.
10.2 BY METRA. Metra hereby represents and warrants to Cholestech that: (i)
Metra has the right to enter into and perform Metra's obligations under this
Agreement and to grant the license and sublicense granted herein, and to supply
the Reagents; (ii) to the best of Metra's knowledge and belief, the execution,
delivery, and performance of this Agreement does not conflict with, violate, or
breach any agreement filed by Metra as a "material contract" pursuant to Item
601(b)(10) of Regulation S-K under The Securities Act of 1933, as amended, or
with Metra's Articles of Incorporation or Bylaws; (iii) to the best of its
knowledge and belief as of the Effective Date of this Agreement, the
manufacture, use, sale, offer to sell or importing of Licensed Product and
Future Licensed Products based on the Metra Technology in the Territory does not
infringe or violate any patent, trademark, or copyright or any other
intellectual property or proprietary rights of any third party, and during the
Term of this Agreement Metra shall discuss and report to the Development
Committee any knowledge or belief that the manufacture, use, sale, offer to
sell, or importing of the Licensed Product or Future Licensed Products based on
the Metra Technology in the Territory infringes or violates any patent,
trademark, or copyright or any other intellectual property or proprietary rights
of any third party; (iv) to the
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best of Metra's knowledge and belief, there are no pending actions, either
actual or threatened, relating to Metra Technology or Metra Patents; and (v) the
Metra Patents and/or Metra Technology have not knowingly been obtained through
any activity, omission or representation that would limit or destroy the
validity of the Metra Patents and/or Metra Technology and Metra has no knowledge
or information that would materially impact the validity and/or enforceability
of the existing Metra Patents and/or Metra Technology.
10.3 MUTUAL. The parties hereby represent and warrant to each other that
they will reasonably promptly keep the other party hereto informed of all
material information concerning Licensed Products and Future Licensed Products.
10.4 DISCLAIMER OF WARRANTIES. EXCEPT AS SPECIFICALLY SET FORTH HEREIN,
NEITHER PARTY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE AND ANY OTHER STATUTORY WARRANTIES.
SECTION 11: INDEMNIFICATION
11.1 BY METRA. Subject to the provisions of Section 11.3 hereto, Metra
hereby agrees at all times during the Term of this Agreement to be responsible
for, and to indemnify, defend and hold harmless Cholestech from and against any
and all claims, actions, proceedings, expenses, liabilities or losses, including
reasonable legal expenses and costs, including attorney fees: (i) arising from
or based on a breach of Metra's representations and warranties contained in
Section 10.2 hereto; (ii) resulting from personal injury, product liability or
property damage relating to or arising from the manufacture, use or sale of
Reagents by Cholestech or its Affiliates; and (iii) any third party claims,
suits, actions, proceedings, liabilities or losses arising from infringement or
violation of any patent, trademark, or copyright or any other intellectual
property or proprietary rights of such third party arising from the manufacture,
use, sale, offer to sell or importing of Reagents in the Territory; UNLESS and
to the extent such claims, actions, proceedings, liabilities or losses arise
from Cholestech Technology as such Cholestech Technology is supplied by
Cholestech, or unless and to the extent that such claims, actions, proceedings,
liabilities or losses arise from the gross negligence or intentional misconduct
of Cholestech, either in whole or in part.
11.2 BY CHOLESTECH. Subject to the provisions of Section 11.3 hereto,
Cholestech hereby agrees to indemnify, defend and hold harmless Metra from and
against any and all claims, actions, proceedings, liabilities or losses,
including reasonable legal expenses and costs, including attorney fees: (i)
arising from or based on a breach of Cholestech's representations and warranties
contained in Section 10.1 hereto; (ii) resulting from personal injury, product
liability or property damage relating to or arising from the manufacture, use or
sale of Licensed Products or Future Licensed Products by Cholestech or its
Affiliates, unless and to the extent such claims, actions, proceedings,
liabilities or losses arise from Reagent(s) as such Reagent(s) is (are) supplied
by Metra, or unless and to the extent that such claims, actions, proceedings,
liabilities or losses arise from the gross negligence or intentional misconduct
of Metra, either in whole or in
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part; and (iii) any third party claims, suits, actions, proceedings, liabilities
or losses arising from infringement or violation of any patent, trademark, or
copyright or any other intellectual property or proprietary rights of such third
party arising from the manufacture, use, sale, offer to sell or importing of
Licensed Product and Future Licensed Products in the Territory, unless and to
the extent such claims, suits, actions, proceedings, liabilities or losses arise
from Reagent(s) as such Reagent(s) is (are) supplied by Metra, or unless and to
the extent that such claims, suits, actions, proceedings, liabilities or losses
arise from the gross negligence or intentional misconduct of Metra, either in
whole or in part.
11.3 NOTIFICATION. The parties shall promptly notify each other of any
claims or suits with respect to which indemnification is sought. The party
requesting indemnification shall permit the indemnifying party to assume the
defense of such claims or suits giving rise to the request at the indemnifying
party's expense. The requesting party shall cooperate with the indemnifying
party in such defense when reasonably requested to do so. No settlement or
compromise shall be binding on a party to this Agreement without such party's
prior written consent, such consent not to be unreasonably withheld.
11.4 LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY HERETO BE
LIABLE FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES SUFFERED
BY THE OTHER PARTY ARISING IN ANY WAY OUT OF THIS AGREEMENT, HOWEVER CAUSED
AND ON ANY THEORY OF LIABILITY; PROVIDED HOWEVER, THAT THE FOREGOING LIMITATION
SHALL NOT APPLY TO A BREACH BY EITHER PARTY OF SECTION 12. THIS LIMITATION WILL
APPLY EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
11.5 ACTION AGAINST INFRINGERS. If during the term of this Agreement,
either party becomes aware of a third party infringement or threatened
infringement of any Cholestech Patent or Metra Patent in the Territory, or any
misappropriation of Cholestech Technology or Metra Technology that is
incorporated in or related to Licensed Product or Future Licensed Products, the
following provisions shall apply:
11.5.1 The party having such knowledge shall promptly give notice to the
other party, with all available details.
11.5.2 Metra shall have the right, but not the obligation, to pursue in
its name at its own expense efforts to restrain such infringement and to recover
profits and damages if such infringement relates to Metra Technology or Metra
Patents. Cholestech agrees at Metra's request to cooperate in the pursuit
thereof, as is reasonably necessary, at Metra's expense. If Metra decides to
undertake such action, then Metra shall have the sole right to control
prosecution but Metra shall keep Cholestech informed on a regular basis as to
the status of such action.
11.5.3 If Metra fails to take action within [ ]
after becoming aware of such infringement, in the first instance or by notice
from Cholestech, then Cholestech, at any time prior to Metra thereafter taking
action, shall have the right, but not the obligation to take such action in its
own name or in the name of Metra as it deems necessary or appropriate;
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PROVIDED, HOWEVER, that: (i) such infringement arises out of activities
occurring in the territories [ ]; (ii)
such infringement relates to Metra Technology or Metra Patents in or covering
Licensed Product or Future Licensed Products; (iii) [ ];
and (iv) Cholestech shall not settle any such action without Metra's prior
consent, which shall not be unreasonably
withheld. In the event that Cholestech exercises its rights under this Section
11.5.3, Metra shall have the right to observe in any such action hereunder, and
Cholestech shall pay for Metra's reasonable attorneys fees associated with such
observation. Metra shall cooperate with Cholestech, at Cholestech's expense, as
is reasonably necessary in any such action brought by Cholestech. If Cholestech
brings legal action, Cholestech shall have the sole right to control prosecution
and shall be entitled to the full share of any recovery, including all of
Cholestech's lost profits and damages.
11.5.4 Cholestech shall have the right, but not the obligation, to
pursue in its name at its own expense efforts to restrain such infringement and
to recover profits and damages if such infringement relates to Cholestech
Technology or Cholestech Patents. Metra agrees at Cholestech's request to
cooperate in the pursuit thereof, as is reasonably necessary, at Cholestech's
expense. If Cholestech decides to undertake such action, then Cholestech shall
have the sole right to control prosecution but Cholestech shall keep Metra
informed on a regular basis as to the status of such action.
11.5.5 If Cholestech fails to take action within [ ]
after becoming aware of such infringement, in the first instance or by notice
from Metra, then Metra, at any time prior to Cholestech thereafter taking
action, shall have the right, but not the obligation to take such action in
its own name or in the name of Cholestech as it deems necessary or appropriate;
PROVIDED, HOWEVER, that: (i) such infringement arises out of activities
occurring in the territories [ ]; (ii) such infringement relates to
Cholestech Technology or Cholestech Patents in or covering Licensed Product or
Future Licensed Products and relates to a biochemical marker that is competitive
with a biochemical marker in the Licensed Product or Future Licensed Products,
exclusive of any Cholestech Technology or Cholestech Patents in or covering
Cholestech's L-D-X-Registered Trademark- point-of-care instrument; (iii)
[ ]; and (iv) Metra shall not
settle any such action without Cholestech's prior consent, which shall not be
unreasonably withheld. In the event that Metra exercises its rights under this
Section 11.5.5, Cholestech shall have the right to observe in any such action
hereunder, and Metra shall pay for Cholestech's reasonable attorneys fees
associated with such observation. Cholestech shall cooperate with Metra, at
Metra's expense, as reasonably necessary in any action brought by Metra. If
Metra brings legal action, Metra shall have the sole right to control such
action and shall be entitled to the full amount of any recovery, including all
of Metra's lost profits and damages.
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SECTION 12: CONFIDENTIALITY
12.1 "CONFIDENTIAL INFORMATION" shall mean any and all non-public and
proprietary information, including, without limitation, information relating to
the Technical Information of the other party, the Cholestech Patents, Cholestech
Technology, Cholestech Inventions, Metra Patents, Metra Technology, Metra
Inventions, or Joint Inventions, and the business plans of the other party,
including information provided by either party to the other party prior to the
Effective Date, which such party knows or has reason to know are or contain
trade secrets or other proprietary information of the other, and which is
specifically designated as such and which is disclosed by either party to the
other in any form in connection with this Agreement, and if orally disclosed, is
reduced in writing and provided to the other party within thirty (30) days of
such disclosure. During the term of this Agreement and thereafter, each party
shall maintain in confidence all Confidential Information and materials
disclosed by the other party and shall not use such Confidential Information for
any purpose except as permitted by this Agreement or disclose the same to anyone
other than those of its Affiliates, sublicensees, employees, consultants, agents
or subcontractors as are necessary in connection with such party's activities as
contemplated in this Agreement. Each party shall obtain a written agreement
from any sublicensees, employees, consultants, agents and subcontractors, prior
to disclosure, to hold in confidence and not make use of such Confidential
Information for any purpose other than those permitted by this Agreement.
12.2 EXCEPTIONS. Notwithstanding the above, neither party shall have
liability to the other with regard to any Confidential Information that: (i)
was generally known and available to the public domain at the time it was
disclosed, or becomes generally known and available to the public domain through
no fault of the receiving party; (ii) was known to the receiving party, or was
independently developed by or on behalf of the receiving party without benefit
of Confidential Information prior to the time of disclosure as shown by the
written records in existence at the time of disclosure; (iii) is disclosed with
the prior written approval of the disclosing party; (iv) becomes known to the
receiving party from a source other than the disclosing party without breach of
this Agreement by the receiving party and in a manner which is otherwise not in
violation of the disclosing party's rights; or (v) is disclosed by the receiving
party pursuant to the order or requirement of a court, administrative agency, or
other governmental body; PROVIDED, HOWEVER, that the receiving party shall
provide reasonable advance notice to enable the disclosing party to seek a
protective order or otherwise prevent such disclosure, or necessary to comply
with the rules and regulations promulgated by the Securities and Exchange
Commission.
12.3 AGREEMENT AND TERMS CONFIDENTIAL. Unless otherwise agreed to in
writing or as necessary to comply with a valid legal order of a court of law or
agency of competent jurisdiction or with the rules and regulations promulgated
by the Securities and Exchange Commission, both the existence and terms of this
Agreement shall be kept confidential by the parties.
12.4 PUBLICATION. Both parties agree not to publish any reports or papers,
make any public presentation or otherwise publicly disseminate any information
relating to any aspect of the development or manufacture of Licensed Product or
Future Licensed Products which includes
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Confidential Information or other documentation or data belonging to the other,
including any reference to Metra Technology or Cholestech Technology, and which
was received pursuant to the terms of this Agreement without first obtaining
written consent of the other party hereto, unless and to the extent disclosure
of such documentation or data is necessary to comply with any law or government
regulations, and provided further that the non-publishing party is so notified.
Both parties also agree to provide each other with a manuscript of any proposed
publication or written summary of any proposed oral disclosure at least thirty
(30) days prior to submission thereof for publication and to incorporate any
changes in such manuscript as are necessary to protect the Confidential
Information of the non-publishing party. Cholestech and Metra may also require
the other to include an acknowledgment of its role in any study to be published.
SECTION 13: TERM AND TERMINATION
13.1 TERM AND EXPIRATION. The term of this Agreement shall be ten (10)
years from the Effective Date (the "TERM") and, in the event that the Licensed
Product is commercially released within such Term, the parties hereto agree to
negotiate in good faith to extend the Term of this Agreement. This Agreement
may be terminated at any time upon mutual agreement of the parties. Termination
or expiration of this Agreement shall not release any party hereto from any
liability which, at the time of such termination or expiration, has already
accrued to the other party, or which is attributable to such termination or
expiration, nor shall it preclude either party from pursuing all rights and
remedies it may have hereunder or at law or in equity with respect to any breach
of this Agreement.
13.2 TERMINATION WITH CAUSE. Upon any material breach of this Agreement by
either party, the non-breaching party may terminate this Agreement upon [
] written notice to the breaching party. The notice shall become
effective at the end of the [ ] period unless the breaching party
shall cure such breach within such period. Metra shall have the right to
terminate this Agreement if all development milestones in the Milestone Schedule
set forth in EXHIBIT B attached hereto have not been achieved within two (2)
years following the Effective Date.
13.3 RIGHTS BY METRA UPON TERMINATION. In the event that Metra terminates
this Agreement pursuant to Section 13.2, and Cholestech desires to retain
distribution rights for the Licensed Product, and/or Future Licensed Products,
Cholestech shall have a limited non-exclusive, royalty-bearing right and license
to distribute the Licensed Product in the Territory for so long as Cholestech
pays to Metra a royalty of [ ] of the [ ]
for the Licensed Product (the "TERMINATION ROYALTIES"); PROVIDED, HOWEVER,
[ ]. Upon such termination by Metra, Metra will
continue to supply Reagents to Cholestech at
a cost to Cholestech of [ ].
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13.4 RIGHT TO SELL STOCK ON HAND. Upon the termination of any license
granted hereunder for any reason other than a failure to cure a material breach
of this Agreement as set forth in Section 13.2 by Cholestech, Cholestech shall
have the right for [ ] thereafter to dispose of all Licensed Product
and Future Licensed Product then on hand to which such termination applies, and
any royalties due and owing shall be paid to Metra with respect to Net Sales of
such Licensed Product and Future Licensed Product as though such license had not
terminated.
13.5 BANKRUPTCY. All rights and licenses granted under or pursuant to this
Agreement by Metra to Cholestech in respect of Metra Patents and Metra
Technology are and shall otherwise be deemed to be, for purposes of Section
365(n) of the Bankruptcy Code, licenses of rights to "Intellectual Property" as
defined under Section 101(57) of the Bankruptcy Code. The parties agree that
Cholestech, as licensee of such rights and licenses, shall retain and may fully
exercise all of its rights and elections under the Bankruptcy Code. The parties
further agree that, in the event that any proceeding shall be instituted by or
against Metra seeking to adjudicate it as bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law relating to bankruptcy,
insolvency, or reorganization or relief of debtors, or seeking an entry of any
order for relief or the appointment of a receiver, trustee or other similar
official for it for any substantial part of its property or if it shall take any
action to authorize any of the foregoing actions (each "PROCEEDING"), Cholestech
shall have the right to retain and enforce its rights under this Agreement,
including, but not limited to the following rights:
(i) The right to continue to use the Licensed Product and Future
Licensed Products and all versions and derivatives thereof, and all
documentation and other supporting material relating thereto, in accordance with
the terms and conditions of this Agreement;
(ii) The right to a complete duplicate of (or complete access to,
as appropriate) all Metra Patents and Metra Technology, if not already in
Cholestech's possession, which shall be promptly delivered to Cholestech upon
any such commencement of a Proceeding upon written request therefore by
Cholestech, unless Metra elects to continue to perform all of its obligations
under this Agreement; or if not otherwise delivered upon rejection of this
Agreement by or on behalf of Metra upon written request therefore by Cholestech;
and
(iii) The right to obtain from Metra all documentation and
supporting documents relating to the Licensed Product and Future Licensed
Products and all versions and derivatives thereof.
SECTION 14: MISCELLANEOUS PROVISIONS
14.1 RELATIONSHIP OF PARTIES. Cholestech and Metra shall be independent
contractors and shall not be deemed to be parties, joint venturers or each
other's agents or employees, and neither party shall have the right to act on
behalf of the other except as is expressly set forth in this Agreement.
14.2 SURVIVAL. The provisions of Sections 1, 5.5, 6.3(c), 6.3(d), 6.3(e),
9, 10, 11, 12, 13.3, 13.4, and 14, shall survive termination or expiration of
this Agreement.
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14.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding between the parties and supersedes all previous agreements,
promises, representations, understandings, and negotiations, whether written or
oral between the parties with respect to the subject matter hereof. There shall
be no amendments or modifications to this Agreement, except by a written
document signed by both parties.
14.4 ASSIGNMENT. This Agreement shall not be assigned by either party
without the prior written consent of the other party, except as part of a sale
or transfer, by way of merger or otherwise, of all or substantially all of the
business assets of such party to which this Agreement relates, and provided
further that the assignee agrees to be bound in writing by all the terms of
this Agreement in place of the assignor, or the assignor agrees to remain
responsible for the obligations of the assignee pursuant to the terms set
forth herein.
14.5 BINDING UPON SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of successors in interest and assigns of Metra and
Cholestech subject to the limitations on assignment.
14.6 GOVERNING LAW; DISPUTES AND ALTERNATIVE DISPUTE RESOLUTION. This
Agreement shall be construed and enforced in accordance with the laws of the
State of California, without giving effect to its principles of conflicts of
law. Any dispute or claim arising out of or in connection with this Agreement
(unless otherwise set forth herein) shall be resolved in accordance with the
provisions set forth herein and attached as EXHIBIT C attached hereto.
14.7 SEVERABILITY. If any provision of this Agreement is finally held to be
invalid, illegal or unenforceable by a court or agency of competent
jurisdiction, that provision shall be severed or shall be modified by the
parties so as to be legally enforceable (and to the extent modified, it shall be
modified so as to reflect, to the extent possible, the intent of the parties)
and the validity, legality and enforceability of the remaining provisions shall
not be affected or impaired in any way.
14.8 NO WAIVER. Any delay in enforcing a party's rights under this
Agreement or any waiver as to a particular default or other matter shall not
constitute a waiver of a party's right to the future enforcement of its rights
under this Agreement.
14.9 ATTORNEY'S FEES. In the event of a dispute under this Agreement
between the parties, or in the event of any default, the party prevailing in
the resolution of any such dispute or default shall be entitled to request a
recovery of its attorneys' fees and other costs.
14.10 NOTICES. Any notice required or permitted by this Agreement to be
given to either party shall be in writing and shall be deemed given when
delivered personally, by confirmed telecopy to a fax number designated in
writing by the party to whom notice is given, or by registered, recorded or
certified mail, return receipt requested, and addressed to the party to whom
such notice is directed, at:
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If to Cholestech: Cholestech Corporation
3347 Investment Boulevard
Hayward, CA 94545
Telephone: 510-732-7200
Facsimile: 510-732-7227
Attention: President and CEO
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with a copy to: Robert P. Latta, Esq.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Telephone: 415-493-9300
Facsimile: 415-493-6811
If to Metra: Metra Biosystems Inc. cc: Mark Weeks, Esq.
265 North Whisman Road Venture Law Group
Mountain View, CA 94043 2800 Sand Hill Road
Telephone: 415-903-9100 Menlo Park, CA 94025
Fax: 415-903-0500 Telephone: 415-854-4488
Attention: George W. Dunbar, Jr. Fax: 415-854-1121
or at such other address or telecopy number as such party to whom notice is
directed may designate to the other party in writing.
14.11 PUBLIC ANNOUNCEMENTS. The parties will cooperate to create
appropriate public announcements of the relationship set forth in this
Agreement. Neither party shall make any public announcement regarding the
existence or content of this Agreement without the other party's prior written
approval and consent.
14.12 FORCE MAJEURE. If the performance of this Agreement or any obligations
hereunder is prevented, restricted or interfered with by reason of fire or other
casualty or accident, strikes or labor disputes, war or other violence, any law,
order, proclamation, ordinance, demand or requirement of any government agency,
or any other act or condition beyond the control of the parties hereto, the
party so affected, upon giving prompt notice to the other party shall be excused
from such performance (other than the obligation to pay money) during such
prevention, restriction or interference.
14.13 NO RIGHT OF PUBLICITY. Except as otherwise provided herein, no
right, express or implied, is granted by this Agreement to either party to use
in any manner the name of Cholestech or Metra or any other trade name or
trademark of the other party in connection with the performance of this
Agreement.
14.14 COUNTERPARTS. This Agreement shall be fully executed in two (2)
original counterparts, each of which shall be deemed an original.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, authorized officers of each of Cholestech and Metra
have executed this Agreement as of the date first set forth above.
METRA BIOSYSTEMS, INC. CHOLESTECH CORPORATION
By: By:
-------------------- --------------------
George W. Dunbar, Jr. Warren E. Pinckert II
President and CEO President and CEO
Date: Date:
------------------- -------------------
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EXHIBIT A
LICENSED PRODUCT SPECIFICATIONS
Analytes Deoxypyridinoline (nM) and Creatinine (mM), with
L-D-X-Registered Trademark- capable of displaying
the Dpd, creatinine, and normalized results on LCD
and provide printed results
Format Runs on existing L-D-X-Registered Trademark-
platform with ROM upgrade only
Assay Protocol Suitable for CLIA waved status
Total Assay Time Less than 10 minutes
Sample First or second morning void urine
Correlation to Pyrilinks
-Registered Trademark--D [ ]
-
Reference Range
(normalized) [ ]
Dynamic Range [ ]
Between-run precision [ ]
-
Between-lot precision [ ]
-
Spike recovery & linearity [ ] [ ]
-
[ ]
-
[ ]
-
Cassette Shelf Life [ ]
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EXHIBIT B
DEVELOPMENT AND MILESTONE SCHEDULE
DEVELOPMENT STEPS [ ]
1. Set specifications [ ]
2. Design cassette [ ]
3. Fabricate prototypes [ ]
4. Design tools [ ]
5. Scale-up (pilot mfg) [ ]
6. Run clinical trials [ ]
7. Submit data to FDA [ ]
MILESTONES DATE (EST.)
1. Sign Agreement 5/96
[ ] [ ]
[ ] [ ]
[ ] [ ]
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EXHIBIT C
ALTERNATIVE DISPUTE RESOLUTION MECHANISM FOR
CHOLESTECH/METRA DEVELOPMENT, LICENSE AND DISTRIBUTION
AGREEMENT
1. MEDIATION
In the event that any dispute or claim arising out of or related to this
Agreement is not settled by the parties within the fifteen (15) day negotiation
period, the parties will attempt in good faith to resolve such dispute or claim
by mediation in San Francisco, California, in accordance with the American
Arbitration Association Commercial Mediation Rules. The mediation shall be held
within thirty (30) days of the end of the fifteen day negotiation period.
Nothing herein, however, shall prohibit either party from initiating arbitration
proceedings if such party would be substantially prejudiced by a failure to act
during the time that such good faith efforts are being made to resolve the
dispute or claim through negotiation or mediation. The cost of mediation shall
be shared equally by the parties to the mediation. Any settlement reached by
mediation shall be reduced to writing, signed by the parties, and shall be
binding on them.
2. ARBITRATION
Any dispute or claim arising out of or related to this Agreement, or the
interpretation, making, performance, breach, validity or termination thereof,
which has not been resolved by negotiation or mediation as set forth above,
shall be finally settled by binding arbitration in San Francisco, California,
under the Commercial Arbitration Rules and the Supplementary Procedures for
Large Complex Disputes of the American Arbitration Association (together with
"AAA Rules") by one arbitrator appointed in accordance with the AAA Rules.
This Agreement shall be governed by the law of the state of California.
The arbitrator shall apply California law to the merits of any dispute or claim,
without reference to rules of conflict of law. The arbitrator shall have the
power to decide all questions of arbitrability. The arbitration proceedings
shall be governed by federal arbitration law and by the AAA Rules, without
reference to state arbitration law. At the request of either party, the
arbitrator will enter an appropriate protective order to maintain the
confidentiality of information produced or exchanged in the course of the
arbitration proceedings. Judgment on the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof.
The parties may apply to any court of competent jurisdiction for a
temporary restraining order, preliminary injunction, or other interim or
conservatory relief, as necessary, without breach of this arbitration agreement
and without any abridgment of the powers of the arbitrator.
The arbitrator may award to the prevailing party, if any, as determined by
the arbitrator, all of its costs and fees, including, without limitation, AAA
administrative fees, arbitrator fees,
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travel expenses, out-of-pocket expenses (including, without limitation, such
expenses as copying, telephone, facsimile, postage, and courier fees), witness
fees, and reasonable attorneys' fees.
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EXHIBIT D
INVESTMENT SCHEDULE
I. EQUITY INVESTMENT FUNDING
1. MILESTONE: Execution of Agreement.
EQUITY INVESTMENT: $250,000
Payable by Metra upon execution of this Agreement. Funding to be used to
conduct further development work to [ ]
Purchase price for the shares will be determined by calculating a volume
weighted average based on the five (5) day trading average before the completion
of such milestone.
2. MILESTONE: [ ].
EQUITY INVESTMENT: [ ]
Purchase price for the shares will be determined by calculating a volume
weighted average based on the five (5) day trading average before the completion
of such milestone.
3. MILESTONE: [ ]
EQUITY INVESTMENT: [ ]
Purchase price for the shares will be determined by calculating a volume
weighted average based on the five (5) day trading average before the completion
of such milestone.
II. LOANS TO CHOLESTECH
The following two milestones are subject to the provisions of Section 6.3
of this Agreement:
4. MILESTONE: [ ]
LOAN AMOUNT: [ ]
5. MILESTONE: [ ]
LOAN AMOUNT: [ ]
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EXHIBIT E
FORM OF REGISTRATION RIGHTS AGREEMENT
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EXHIBIT F
TRADEMARKS
I. METRA TRADEMARKS
Pyrilinks-Registered Trademark--D
Metra Biosystems
II. CHOLESTECH TRADEMARKS
Cholestech L-D-X-Registered Trademark-
Cholestech
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EXHIBIT 10.16
EXHIBIT E
CHOLESTECH CORPORATION
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made as of May 3, 1996,
by Cholestech Corporation (the "Company") and Metra Biosystems, Inc. ("Metra")
pursuant to that Development, License and Distribution Agreement dated as of May
3, 1996 (the "Development Agreement").
SECTION 1
RESTRICTIONS ON TRANSFERABILITY;
REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"HOLDER" shall mean Metra and any person holding Registrable
Securities to whom the rights under this Agreement have been transferred in
accordance with Section 1.14 hereof.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding (i) the
compensation of regular employees of the Company which shall be paid in any
event by the Company, and (ii) the fees and costs of any legal counsel of
Metra).
"REGISTRABLE SECURITIES" means (i) the Common Stock issuable or issued
to Metra pursuant to the Development Agreement (the "Stock") and (ii) any Common
Stock of the Company issued or issuable in respect of the Stock or other
securities issued or issuable with respect to the Stock upon any stock split,
stock dividend, recapitalization, or similar event; PROVIDED, HOWEVER, that
shares of Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or
<PAGE>
dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale.
"RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear the legend set forth in Section 1.3 of this Agreement.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).
1.2 RESTRICTIONS. The Stock shall not be sold, assigned, transferred or
pledged except upon the conditions specified in this Agreement, which conditions
are intended to ensure compliance with the provisions of the Securities Act.
Metra will cause any proposed purchaser, assignee, transferee or pledgee of the
Stock to agree to take and hold such securities subject to the provisions and
upon the conditions specified in this Agreement.
1.3 RESTRICTIVE LEGEND. Each certificate representing (i) the Stock and
(ii) any other securities issued in respect of the Stock upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 1.4 below) be stamped
or otherwise imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO
RULE 144 OF SUCH ACT."
Metra consents to the Company making a notation on its records and giving
instructions to any transfer agent of the Restricted Securities in order to
implement the restrictions on transfer established in this Section 1.
1.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing restricted securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any restricted securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the
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manner and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied at such holder's expense by either
(i) an unqualified written opinion of legal counsel who shall, and whose legal
opinion shall be, reasonably satisfactory to the Company, addressed to the
Company, to the effect that the proposed transfer of the restricted securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such restricted securities shall be entitled to transfer such
restricted securities in accordance with the terms of the notice delivered by
the holder to the Company. The Company will not require such a legal opinion or
"no action" letter (a) in any transaction in compliance with Rule 144, or (b) in
any transaction in which Metra distributes restricted securities after six (6)
months after the purchase thereof solely to its majority-owned subsidiaries or
affiliates for no consideration, provided that each transferee agrees in writing
to be subject to the terms of this Section 1.4. Each certificate evidencing the
restricted securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 1.3 above, except that such certificate shall not bear such
restrictive legend if, in the opinion of counsel for such holder and the
Company, such legend is not required in order to establish compliance with any
provisions of the Securities Act.
1.5 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. In the event a Holder requests a
registration on Form S-3 pursuant to Section 1.7 below and the Company is not
entitled to use Form S-3 to register the Registrable Securities, the Company
will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within fifteen (15) days after receipt of such written notice
from the Company; PROVIDED, HOWEVER, that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 1.5:
(1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
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(2) During the period starting with the date sixty (60)
days prior to the Company's estimated date of filing of, and ending on the date
six (6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement is
made in good faith; or
(3) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 may be deferred for a period of ninety
(90) days from the date of receipt of written request from the Initiating
Holders.
Subject to the foregoing clauses (1) through (3), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Holders.
(b) UNDERWRITING. In the event that a registration pursuant to
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to
Section 1.5 shall be conditioned upon such Holder's participation in the
underwriting arrangements required by this Section 1.5 and the inclusion of such
Holder's Registrable Securities in the underwriting, to the extent requested, to
the extent provided in this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by
Metra (which managing underwriter shall be reasonably acceptable to the
Company).
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Holders. The Registrable
Securities and/or other securities so withdrawn shall also be withdrawn from
registration, and such Registrable Securities shall not be transferred in a
public distribution prior to one hundred eighty (180) days after the effective
date of such registration.
1.6 COMPANY REGISTRATION.
(a) NOTICE OF REGISTRATION. If, beginning one (1) year
following the date of this Agreement, at any time or from time to time, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
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(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved in such registration, all the Registrable Securities specified in a
written request or requests made within fifteen (15) days after receipt of such
written notice from the Company by any Holder; PROVIDED, HOWEVER, that between
the first and second anniversary dates of this Agreement, the Company shall only
be required to include in such registration one-half (1/2) of the Registrable
Securities. From the second anniversary date of this Agreement, the Company
shall include in such registration all of the Registrable Securities requested
by the Holder.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company. If any
Holder or other holder disapproves of the terms of any such underwriting, he,
she or it may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of the registration statement relating thereto.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
1.7 REGISTRATION ON FORM S-3.
(a) If, beginning one (1) year following the date of this Agreement,
any Holder requests that the Company file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of shares of the
Registrable Securities, the reasonably anticipated aggregate price to the public
of which, net of underwriting discounts and commissions, would exceed $350,000,
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form; PROVIDED, HOWEVER, that the Company shall not be required to
effect more than two (2) registrations pursuant to this Section 1.7 in any
twelve (12) month period. The Company will (i) promptly give written notice of
the proposed registration to all other Holders, and (ii) as soon as practicable,
use its best efforts to effect such registration (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable
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regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within fifteen
(15) days after receipt of such written notice from the Company; PROVIDED,
HOWEVER, that between the first and second anniversary dates of this Agreement,
the Company shall only be required to include in such registration one-half
(1/2) of the Registrable Securities. From the second anniversary date of this
Agreement the Company shall include in such registration all of the Registrable
Securities requested by the Holder. The substantive provisions of
Section 1.5(b) shall be applicable to each registration initiated under this
Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
starting with the date sixty (60) days prior to the filing of, and ending on a
date six (6) months following the effective date of, a registration statement
(other than with respect to a registration statement relating to a Rule 145
transaction, an offering solely to employees or any other registration which is
not appropriate for the registration of Registrable Securities), provided that
the Company is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective, or (iii) if the Company shall
furnish to such Holder a certificate signed by the president of the Company
stating that, in the good faith judgment of the Board of Directors, it would be
seriously detrimental to the Company or its shareholders for registration
statements to be filed in the near future, then the Company's obligation to use
its best efforts to file a registration statement may be deferred for a period
of ninety (90) days from the receipt of the request to file such registration by
such Holder or Holders.
1.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless (i) such new registration rights,
including standoff obligations, are on a pari passu basis with those rights of
the Holders under this Agreement, or (ii) such new registration rights,
including standoff obligations, are subordinate to the registration rights
granted Holders under this Agreement.
1.9 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 shall be
borne by the Company, provided that the Company shall not be required to pay the
Registration Expenses of any registration proceeding begun pursuant to
Section 1.5, the request of which has been subsequently withdrawn by the
Holders. In such case, the Holders of Registrable Securities to have been
registered shall bear all such Registration Expenses pro rata on the basis of
the number of shares to have been registered. Notwithstanding the foregoing,
however, if at the time of the withdrawal, the Holders have learned of a
material adverse change in the condition, business or prospects of the Company
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from that known to the Holders at the time of their request, of which the
Company had knowledge at the time of the request, then the Holders shall not be
required to pay any of said Registration Expenses. Unless otherwise stated, all
other Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of the registered securities included in
such registration pro rata on the basis of the number of shares so registered.
1.10 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (180) days or until the distribution described in the registration
statement has been completed; and
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
1.11 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the
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Company or such underwriter within the meaning of Section 15 of the Securities
Act, and each other such Holder, each of its officers and directors and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
liability of each Holder under this Subsection (b) shall be limited to an amount
equal to the public offering price of the shares sold by such Holder.
(c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
1.12 INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.13 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the restricted securities to the public without registration, the
Company agrees to use its best efforts to:
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(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) So long as a Holder owns any restricted securities, to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144; and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
1.14 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
register securities granted Holders under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by a Holder
(together with any affiliate); PROVIDED, that (a) such transfer may otherwise be
effected in accordance with applicable securities laws, (b) notice of such
assignment is given to the Company, and (c) such transferee or assignee (i) is a
wholly-owned subsidiary or constituent partner of such Holder, or (ii) acquires
from such Holder at least twenty percent (20%) of the Registrable Securities
held by the Holder.
1.15 TERMINATION OF RIGHTS. The rights of any particular Holder to cause
the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate with respect to such Holder upon the earlier to occur of (i) the date
that is five (5) years after the date hereof, or (ii) at such time as such
Holder is able to dispose of all its Registrable Securities in one three-month
period pursuant to the provisions of Rule 144.
1.16 AMENDMENT This Agreement may be amended or waived with the written
consent of the Company and the Holders of at least a majority of the outstanding
shares of the Registrable Securities. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each Holder of Registrable
Securities and the Company. In addition, the Company may waive performance of
any obligation owing to it, as to some or all of the Holders of Registrable
Securities, or agree to accept alternatives to such performance, without
obtaining the consent of any Holder of Registrable Securities. In the event
that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern.
1.17 THIRD PARTIES. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
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1.18 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California in the United States of America.
1.19 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
1.20 NOTICES. Any notice required or permitted by this Agreement shall be
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown below or at such other address for which
such party gives notice under this Agreement. Such notice shall be deemed to
have been given when delivered if delivered personally, or, if sent by mail, at
the earlier of its receipt or three (3) days after deposit in the mail.
1.21 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
1.22 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CHOLESTECH CORPORATION METRA BIOSYSTEMS, INC.
By: By:
-------------------------- ------------------------------
Title: Title:
----------------------- ---------------------------
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EXHIBIT 23.3
CONSENT OF DEHLINGER & ASSOCIATES
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-1 and the related Prospectus of Cholestech
Corporation (the "Company") for the registration of up to 3,450,000 shares of
Common Stock of the Company, filed with the Securities and Exchange Commission.
DEHLINGER & ASSOCIATES
Palo Alto, California
May 9, 1996
